SKU Rationalization: Definition, Process, and Benefits for E-commerce Success
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Managing a large and diverse product line is the ultimate goal of many enterprises but it’s a a tricky one to sustain. In fact, Deloitte’s 2024 Consumer Products Industry Outlook [1] report emphasizes the need to approach expanding product portfolios with caution. A larger assortment can complicate operations and strain profitability, so new product lines must be a priority only after assessing the current state of your product offerings. In the event of non-performing products within your product range, your first step should be Stock Keeping Unit (SKU) rationalization.
The proliferation of SKUs often leads to increased operational costs, inventory inefficiencies, and reduced profit margins. To avoid this, it is essential for you to identify and eliminate non-essential or low-demand items, and streamline operations through SKU rationalization. It is a strategic manner of managing the complexity of large product lines, reducing costs, and optimizing inventory.
In this article, you will uncover everything there is to know about SKU rationalization and how to use it to your advantage. We will talk about:
- The Meaning of SKU Rationalization in E-commerce
- The SKU Rationalization Process in E-commerce
- SKU Rationalization Benefits for E-commerce Brands
- Overcoming Common SKU Rationalization Challenges
- SKU Rationalization with an Order Management System
- How can an OMS Solution Enable Effective SKU Rationalization
- Conclusion
The Meaning of SKU Rationalization in E-Commerce
SKU rationalization is the process of carefully evaluating each product in your catalog, represented by its unique Stock Keeping Unit (SKU). The goal is to identify which products should be retained, consolidated, or discontinued to optimize your inventory management and improve overall profitability.
Effective SKU rationalization is an ongoing, dynamic process. To keep pace with evolving customer preferences and optimize operations, you need a structured, data-driven approach to SKU management. This requires continuous evaluation along financial, operational, and strategic lines, ensuring each product aligns with business goals.
The SKU Rationalization Process in E-commerce
As SKU rationalization is a continuous process, it’s essential to understand the four main steps it involves. This will ensure you delist all the underperforming products, identify new additions based on demand, and also have sufficient space in your warehouse. Let’s explore each step in detail below:
1. Data collection
Data collection forms the bedrock of SKU rationalization. You can start by collecting historical data on sales, demand patterns, inventory levels, and costs associated with each SKU. Also consider external factors like market conditions and competition to make informed decisions about retaining, consolidating, or discontinuing SKUs. Consider software like digital shelf analytics, order management reports, inventory management reports, etc., to gather the data you need.
2. Data analysis
Once you’ve collected the relevant data, you can evaluate the current performance and future potential of each SKU. Key steps in data analysis include:
- Define objectives and criteria: Clearly establish your goals for SKU rationalization, such as reducing inventory costs, improving profitability, or streamlining operations. Based on these objectives, define the criteria that will be used to rank SKUs.
- Select ranking methods: Choose appropriate methods to analyze and rank your SKUs. Common ones include:
- SKU rationalization, the 80/20 rule: This rule suggests that 80% of your sales come from 20% of your SKUs.
- ABC analysis: It involves categorizing SKUs into three groups based on their sales volume and profitability (A, B, and C).
- Product life cycle analysis: Here you evaluate the stage of each SKU’s life cycle, that is introduction, growth, maturity, or decline.
- Customer segmentation: This is where you analyze which SKUs are popular with different customer segments.
- Evaluate SKU performance: Use relevant metrics to assess the performance of each SKU. This can include sales volumes, inventory turnover, storage costs, customer acquisition costs, revenues and margins
- Collect and organize data: Utilize inventory management software, spreadsheets, or analytical tools to gather and organize your SKU data. This will help you create a list of SKUs that are candidates for elimination or reduction.
3. Decision making
Decision-making in SKU rationalization involves determining the fate of SKUs: retention, modification, or elimination. Clear objectives and criteria, coupled with key performance indicators and benchmarks will guide informed decisions. Data-driven insights reveal gaps and opportunities, enabling strategic actions like inventory adjustments, pricing and promotion strategies, and SKU elimination.
4. Implementation
Effective implementation necessitates clear communication with all stakeholders, including employees, suppliers, distributors, and customers. Post-implementation, tracking KPIs and customer feedback is essential to measure results and make necessary adjustments. Regular review and updates of the SKU rationalization process ensure ongoing effectiveness and alignment with business objectives.
SKU Rationalization Benefits for E-commerce Brands
SKU rationalization is a strategic decision that can have a significant impact on your company’s operations and financial performance. By keeping your SKU count stable, eliminating underperforming items and introducing new ones with high demand, you can gauge customer response. This strategy can enable bulk purchasing power, simplify supplier management, and reduce the risk of excess inventory.
For a better understanding of the advantages offered by SKU rationalization, we’ve broken them down below:
- Enhanced forecasting accuracy: By analyzing historical demand data for each SKU, businesses can gain valuable insights into sales patterns and improve the accuracy of their demand forecasts. This enables more effective inventory planning and resource allocation.
- Improved operational efficiency: A well-managed product portfolio can increase manufacturing efficiency. With fewer product variations, fewer changeovers are required, resulting in reduced downtime and improved productivity.
- Lower inventory carrying costs: Fewer SKUs mean less inventory to store, leading to reduced warehousing costs, insurance premiums, labor expenses, and other associated expenses.
- Increased focus on product innovation: By eliminating SKUs that no longer make money, you free up more resources for research and development. This allows for greater investment in innovative products that meet customer needs and drive growth.
- Reduced raw material and packaging costs: Discontinued SKUs often involve higher production costs or require specialized raw materials. By reducing the product line, businesses can lower their procurement costs and simplify their supply chain.
- Decreased logistics costs: A smaller product portfolio can reduce the complexity of logistics operations. Fewer SKUs may lead to fewer suppliers, reduced transportation costs, and simplified warehousing and distribution processes.
- Improved profit margin: Ultimately, the primary goal of SKU rationalization is to increase profitability. By reducing costs and improving efficiency, you enhance your bottom line.
Overcoming Common SKU Rationalization Challenges
Although SKU rationalization offers significant benefits, it can get challenging. Even well-planned strategies may face obstacles that hinder success. To ensure smooth implementation and maximize results, it’s crucial to anticipate and address these challenges proactively.
- Inaccurate demand forecasting: Misjudging future demand can lead to the discontinuation of valuable SKUs, resulting in lost sales. This is often the result of inaccurate sales and inventory reports, ineffective pricing models or product information and images. Without an accurate picture of the problem, it’s tough to take the right call.
- Supplier disruption: Changes to SKU portfolios can disrupt supplier relationships. Open communication, early involvement of suppliers, and a gradual implementation of portfolio changes can help mitigate these disruptions.
- Resistance to change: Sales and marketing teams may resist SKU rationalization due to established relationships with certain products or concerns about losing variety. Addressing these concerns through clear communication, setting appropriate KPIs, and fostering a “win-win” mindset can help overcome resistance and ensure successful implementation.
- Impact on customer choice: Striking the right balance between customer choice and profitability is a complex challenge in SKU rationalization. Selecting SKUs for elimination, while considering factors like customer demand and market trends, can impact customer satisfaction. The solution to mitigate this challenge involves high operational complexity.
SKU Rationalization with an Order Management System
SKU rationalization, a strategic approach to optimize product portfolios, can be significantly enhanced through the implementation of a cloud-based Order Management System (OMS). These systems leverage real-time data on product performance helping you decide which SKUs to retain, modify, or eliminate. The insights from an OMS also enhance forecasting accuracy, improve cross-functional decision making and optimize inventory.
If you’re seeking to automate SKU analysis and optimize product management across all your sales channels an advanced cloud-based OMS can offer:
- Data collection and analysis: The OMS collects real-time data on sales, inventory levels, customer demand, and other performance metrics for each SKU. It consolidates data from multiple channels, including online marketplaces, retail stores, and warehouses. By analyzing these data points, you can identify trends such as seasonality, peak demand periods, and best-selling products.
- SKU performance scoring: Many OMS platforms can score each SKU based on specific metrics, like sales velocity, margin contribution, and inventory turnover. This scoring allows you to determine which SKUs are performing well, which are underperforming, and which may need further attention or adjustments (promotional assistance, product listing improvements, etc.).
- Automated reporting and insights: An advanced OMS provides insights on SKUs that might need discontinuation, reduction, or restocking based on historical sales data. For instance, if certain SKUs consistently have low sales and occupy valuable warehouse space, the system can flag these for possible phase-out or suggest alternative strategies like bundling or discounting to boost sales.
- Multi-channel management and consistency: The OMS will ensure that SKU changes, such as product discontinuations, are updated across all your channels. This synchronization prevents issues like order cancellations, which can negatively impact your business image across platforms.
- Cost and inventory optimization: By helping businesses identify slow-moving or redundant SKUs, the OMS facilitates cost savings on inventory carrying costs, reduces waste, and frees up warehouse space. This helps maintain a streamlined product catalog focused on high-performing items.
Conclusion
SKU rationalization is a powerful strategy for e-commerce brands to improve operational efficiency, reduce costs, and enhance profitability. By focusing on high-demand and profitable SKUs, businesses can streamline their product catalog and free up valuable resources for innovation and growth. However, successful SKU rationalization requires the right tools.
By leveraging SKU rationalization through a robust OMS, you can maintain a lean, demand-driven product catalog that aligns with market trends and customer expectations. If you’re ready to experience this, implementing a cloud-based OMS should be the next step. Anchanto’s Order Management System offers the necessary tools to automate and optimize SKU rationalization, empowering businesses like yours to take control of inventory and enhance e-commerce operations.
To understand how Anchanto can help your business, request a demo today.
References –
[1] – Deloitte.com – 2024 consumer products industry outlook
https://dealhub.io/glossary/sku-management
https://www.planettogether.com/blog/the-benefits-of-sku-rationalization
https://medium.com/@Snaptimal/sku-rationalization-101-what-is-it-how-to-get-it-right-caa73b4bab68