A Guide to SKU Rationalization for E-commerce Businesses

Stock Keeping Unit (SKU) rationalization is the process of identifying and removing underperforming products from the e-commerce catalog. E-commerce sellers apply this process to keep the inventory lean and optimized while maximizing business revenue.

SKU rationalization helps sellers write off underperforming assets in their inventory by assessing the trade-offs between immediate and long-term impact. Apart from cost savings, sellers achieve operational efficiency in the e-commerce business by simplifying order management, warehousing, and fulfillment processes. E-commerce SKU rationalization at scale becomes a great way for e-commerce stores of all sizes to maximize profitability and align their business to their customer’s needs.

While SKU rationalization is impressive in helping sellers double down on their gains, it can backfire when done inaccurately.

Removing popular or essential items from your online store’s product listing can lead to dissatisfied and frustrated customers. Additionally, failing to remove undesirable items can ultimately increase inventory holding costs and sometimes result in dead stock.

Although it may appear simple, SKU rationalization involves more than analyzing individual product revenues, sorting them in decreasing order, and eliminating the last one on the list.

Low sales could occur due to many reasons such as:

• Slow seasonal demands
• Availability of better options elsewhere
• Insufficient product promotion. 

Teams need to ensure the product being removed from their catalog isn’t affected by one of these.

Then, there is vendor management, supply chain updates, and handling customer expectations to maintain a reputable seller rating.

Oversights in one of these processes can be costly, especially for niche e-commerce stores or budding online shops. It is crucial for e-commerce businesses to approach SKU rationalization in a measured and structured way.

In this article, let’s understand SKU rationalization closely, look at the steps e-commerce businesses need to take, and learn how to handle challenges that might arise.

Understanding SKU Rationalization

An SKU is a unique marker for every unit in an e-commerce store’s warehouse. It contains product details such as weight, dimensions, color, type, etc. Sellers who store inventory in localized fulfillment centers for distributed inventory management can track that unit and the product performance by simply monitoring these numbers.

When monitored through a centralized order management dashboard, the SKUs also help quickly determine if a product is performing poorly. Consequently, e-commerce businesses can remove that item from their catalog to optimize their inventory costs and maximize profits. This is known as SKU rationalization.

In e-commerce, SKU rationalization is sometimes confused with SKU proliferation.

SKU proliferation is a process where new products and items are added to the inventory to attract a wider audience. Like rationalization, proliferation also aims to boost revenue by optimizing the catalog based on the audience’s needs, causing confusion between the two terms.

However, SKU rationalization involves removing products from the commerce online store catalog, whereas SKU proliferation involves adding products.

Why is SKU Rationalization Important for E-commerce

SKU rationalization plays a crucial role in improving inventory management. 

By focusing on high-performing SKUs and eliminating low-performing ones, businesses can reduce excess stock and minimize the risk of obsolescence. This streamlined approach ensures that the inventory is more aligned with actual demand, and sellers do not have to invest heavily in inventory storage, which attracts high holding costs.

It leads to better stock availability and fewer out-of-stock situations.

Optimizing the range of SKUs can also enhance supply chain efficiency. 

With a more focused inventory, businesses can streamline procurement, reduce storage costs, and improve warehouse operations. This leads to faster order fulfillment and lower operational costs. 

Additionally, a simplified product range allows for more accurate forecasting and better demand planning when a scalable fulfillment infrastructure powers your e-commerce business.

The advantages of SKU rationalization extend further to all stakeholders in the e-commerce ecosystem. 

Customers benefit from a more curated and relevant product selection, making it easier to find and purchase desired items. Suppliers and manufacturers experience more consistent and predictable demand, facilitating smoother production schedules. 

For the business, SKU rationalization leads to improved financial performance, as resources are distributed among functions more efficiently to increase profit margins.

Steps to Conduct SKU Rationalization

Sellers need to follow three primary steps to collect relevant data, accurately identify the underperforming SKUs, and rationalize their online store product listing.

1. Data collection and analysis

The first step involves gathering comprehensive sales data and customer insights from your order fulfillment system. As e-commerce teams often use multiple tools, it can be beneficial to build a single source of truth for easier and more comprehensive analysis.

Key metrics to consider here are sales volume, which indicates how often a product is sold; profitability, which assesses the profit margin of each SKU; and inventory holding costs, which reflect the cost of storing each product. 

You can also dive into customer and market data to learn about purchase patterns and seasonal trends. This can be crucial in determining whether an SKU is underperforming or is temporarily experiencing low demand.

By evaluating these metrics, businesses can identify patterns and trends that highlight high-performing and underperforming SKUs. Advanced data analytics tools and business intelligence software can provide detailed reports and visualizations to facilitate decision-making.

2. Identifying underperforming SKUs

SKUs with consistently low sales, minimal profitability, or high storage costs should be flagged for potential elimination. While marking underperforming SKUs, it is essential to be mindful of biases. Cross-verifying inputs through peer reviews can help reduce unintentional biases that could derail e-commerce success.

E-commerce team members need to be looking at the same sales reports and revenue visualizations while deciding whether to drop a product from your listings. As we suggested earlier, integrating all the tools can make it easier.

However, doing that can be challenging, particularly for growing e-commerce companies with limited resources or teams without much technical expertise. Additionally, outsourcing such a core operation can get costly in the long run.

Fortunately, teams can adopt comprehensive solutions that track SKUs in real-time, from the warehouse till it is shipped to the customer. Locad does that.

Locad is an end-to-end logistics solution for e-commerce stores helps businesses store, pack, ship, & track orders by monitoring the SKUs in real time. This broad visibility through the dashboard and advanced reporting features via Locad’s Logistics Engine allows teams to identify and flag underperforming SKUs easily.

Moreover, it also enhances collaboration between internal and external stakeholders, speeding up the decision-making process, which brings us to the third and final step of SKU rationalization.

3. Decision-making and continuous monitoring

This is where different team members summarize the insights and their individual opinions and determine which SKUs will be delisted from the e-commerce catalog. It is beneficial to consider both qualitative and quantitative factors before making any changes to your product listings.

One effective approach is to categorize SKUs into segments based on their performance metrics. For instance, SKUs can be classified as high-performing, moderate-performing, or low-performing. 

High-performing SKUs should be prioritized for retention and potential expansion while low-performing SKUs should be considered for elimination. Moderate-performing SKUs may require further analysis or targeted strategies to improve their performance.

In cases of significant changes, such as introducing new product lines or making major operational adjustments, businesses should consider e-commerce replatforming. Replatforming is the process of migrating to a new e-commerce platform. 

The new platform is designed from the ground up based on the new catalog. This can provide enhanced functionality, better integration with inventory management systems, and improved analytics capabilities, facilitating more effective SKU rationalization in the future.

Sellers should view SKU rationalization as an ongoing process rather than a one-time event. Continuous monitoring and analysis of SKU performance are essential to ensure that the product range remains optimized over time.

Best practices for implementing SKU rationalization

Setting up an SKU rationalization process and managing it over time to retain its efficacy involves several initiatives. Whether it is data points or internal discussions, e-commerce sellers must pay close attention to many aspects throughout the process.

Here are three best practices that simplifies this process:

1. Develop a strategy

Developing a clear strategy involves setting specific objectives that align with the overall business goals. Objectives may include reducing inventory holding costs, improving inventory turnover, or enhancing customer satisfaction by streamlining the product assortment.

Creating a phased implementation plan is crucial to ensure a smooth transition. The plan should outline the steps involved in SKU rationalization, assign responsibilities, and establish timelines. 

A phased approach allows businesses to gradually adjust their inventory and operations, minimizing disruptions and providing opportunities to assess and refine the process at each stage. 

Key phases might include data collection and analysis, SKU evaluation, decision-making, and implementation of changes, identical to the three steps covered earlier.

2. Communication and collaboration

Deciding whether an SKU should be removed individually can increase bias and lead to mistakes. It is a good practice to involve internal stakeholders, country leaders, and front-line customer success team members in the discussion. 

This will invite diverse perspectives and insights that will enable e-commerce teams to see the full picture. Businesses can flag low-performing SKUs without any confusion and doubt to remove them from their e-commerce store listings.

Additionally, this will also make it easier to implement the change. The transparency resulting from continuous communication and collaboration will take surprises away, making the transition smoother.

Businesses can use various channels such as newsletters, website updates, and social media to inform customers about product changes and highlight the benefits of a more curated product selection.

3. Monitor and adjust

Once the initial changes have been implemented, it is important to regularly assess the impact of SKU rationalization on various performance metrics. This includes monitoring sales data, inventory levels, customer feedback, and operational efficiency. 

Locad Logistics Engine’s advanced analytics tools and reporting function can provide real-time insights and help identify trends and patterns that may require further attention.

Adjustments based on performance data ensure that the SKU rationalization process remains dynamic and responsive to changing market conditions.

If certain SKUs, previously eliminated through SKU rationalization, show signs of renewed demand or new market trends emerge, e-commerce sellers should be prepared to reintroduce or add new SKUs back into their product catalog. Similarly, if some retained SKUs underperform, further rationalization may be necessary.

Teams should also document the lessons learned and best practices throughout the process. These insights can inform future SKU rationalization initiatives and other strategic decisions down the line.

Challenges and Solutions

One of the primary challenges in SKU rationalization is various stakeholders’ resistance to change. Sellers accustomed to marketing existing product ranges may be reluctant to adapt to the new strategy. 

This resistance can stem from concerns about the viability of your online store, concerns about increased workload, or uncertainty about the impact on business relationships.

To overcome resistance from stakeholders, it is crucial to implement effective change management strategies. This involves clear and transparent communication about the reasons for SKU rationalization, the expected benefits, and the specific changes that will occur. 

Locad facilitates that by bringing all e-commerce data points and insights to one collaborative platform. SStakeholders can sync their sales order from multiple marketplaces in real-time and make changes to the relevant SKUs, whether it is removing or expanding.

Another significant challenge is the potential negative impact on customer satisfaction. 

Reducing the number of SKUs might lead to customers finding their favorite products discontinued, which can result in dissatisfaction and lost sales. Customers may also perceive a reduced product range as a limitation, potentially driving them to competitors.

To mitigate the potential negative impact on customer satisfaction, sellers must ensure the most valued (not necessarily highest selling) remain on the catalog. Using data-driven insights to identify and retain high-performing SKUs can help maintain such a product range. 

Additionally, e-commerce sellers can also implement phased rationalization, gradually reducing SKUs while monitoring customer feedback and sales performance to make necessary adjustments.

Wrapping Up

SKU rationalization is a crucial strategy for e-commerce businesses to maintain a streamlined, efficient, and profitable inventory. E-commerce businesses can optimize their operations, reduce costs, and improve customer satisfaction by focusing on high-performing products and eliminating underperforming ones. 

However, it’s essential to approach SKU rationalization with a structured and data-driven mindset to avoid potential pitfalls.

There are three significant steps in the SKU rationalization process:

• Data collection and analysis
• Identifying underperforming SKUs and determining which ones to remove.
• Continuously monitoring the performance of the remaining SKUs

E-commerce teams should approach this by developing a clear strategy and highlighting their business goals. Moreover, it is essential to remain transparent with all stakeholders and adapt to market changes as required.

Challenges such as resistance from stakeholders and potential customer dissatisfaction may arise. Sellers should employ effective change management, transparent communication, and a focus on customer-centric decision-making to mitigate them.