SKU Rationalization

SKU rationalization is the process that is used to identify a company’s products and services and to manage its inventory. SKU or Stock Keeping Unit is a type of alphanumeric code that various companies widely use. Usually, all products have unique SKU codes, and some are put in one category to make the work of company employees easier. The SKU rationalization process makes the operations mainstream and helps increase your company’s revenue.

What is SKU Rationalization?

To understand what SKU rationalization is, it is important to know what SKU is. 

SKU stands for ‘Stock Keeping Unit’. It is the way companies use alphanumeric codes to identify their services or products. It helps you to track products and sales easily. If a product with 3 labels will have 3 different SKUs. While SKU codes are important, having too many can cause your business problems. It can confuse and delay your company’s daily operations and logistics regarding many products.

SKU rationalization is when a company decides whether to keep a certain product or discontinue it. It is performed to identify products that should be removed or retained from inventory for cost optimization. The SKU rationalization process is also known as product rationalization or SKU optimization.

Example of SKU rationalization

SKU and SKU rationalization have changed the world of business. They are unique for every new product, which helps suppliers and vendors track their specific products through the supply chain. Sellers can track which product sells more or has more bugs than the others. An example of SKU rationalization is –

Let’s say you have an electronic gadgets store and use the SKU rationalization process. When a newly updated product is launched, you track the sales of that product for a month. You see that new products sell more than older ones. Hence, you will carry fewer older products next month to reflect the demand. As you keep tracking, if the older products stop selling, you don’t carry them anymore. It saves 20%-40% of your total cost, which was your cost to hold the inventory.

Why Should E-commerce Businesses Care About SKU Rationalization?

Companies mainly use SKUs to organize and keep track of their products and inventory. E-commerce companies entirely depend on inventory organization. Usually, as e-commerce companies grow step by step, they spread out from a small area to the entire country. This helps their business grow, but several business issues arise. 

To understand this, let’s go through an example. A particular product might sell more at one place. Stocking said products in every warehouse around the country only hurts the business. SKUs help brilliantly in these situations. 

SKU helps determine which product is not selling at all or selling well at which place. This way, the company can make an informed decision. They can increase or decrease the number of said products in their warehouses. SKUs help e-commerce businesses in many more ways. Here are a few examples that will convince you to care about SKUs if you have an e-commerce business –

Improves inventory optimization

When you assign SKUs to each product of your e-commerce business, those unique SKUs carry a lot of information. These include how much a particular product is selling, how many have been sold, how many are still in stock, how many faulty features have been informed by the customers, and more.

If you are aware of the poor performance of a product at a particular location, you can stop stocking it and cut costs. As customers complain about a product, you will get the product’s status and if they are being upgraded or fixed. 

Streamline inventory management processes

SKUs tell you about the sales of a particular product. This can help you make informed decisions regarding inventory management at your warehouse. For example, if the SKU of a product specifies a product’s high selling rate at a particular location, you can organize the warehouse there. Moving your product in and out of the warehouse will be easier and offer faster delivery service.

SKUs will also help you find your products easily at your storage facility. You can also restock products based on the data available on product availability. Tracking the inventory will become much easier for you, and your day-to-day operations will become streamlined. 

Reduces inventory carrying costs

Inventory carrying cost is one of the largest spendings of an e-commerce company. It includes costs like storage facility rent, personnel and equipment to handle the products, inventory management system, and necessary appliances for different products. For example, if you carry perishable items, you should need cooling appliances to keep them fresh until delivered.

SKUs inform you which product has poor selling performance, so you can discontinue the product. Carrying costs are usually 20%-40% of the inventory value. That is huge, and you can save this cost by making informed decisions.

Better product lifecycle management

The product life cycle starts from its creation to when it is delivered to the customer or product removal. Proper product life cycle management is important for e-commerce companies. The duration a product stays at the e-commerce storage facility is unknown even to the owner. 

Proper life cycle management mostly depends on two things – 

• Proper coordination with other companies you’re doing business with, like suppliers or the logistics company you’re doing business with. 
• Informed decision-making. 

SKU rationalization process helps you by providing all the necessary information, which helps you with decision-making.

Increases profitability

The SKU rationalization process makes your e-commerce business more efficient in many ways. You can track your product through the supply chain. This means that if the product is damaged or lost, you know where it happened. It also informs you about the faulty products in your stock from the feedback from your customers. You get the data on which product is high in demand and requires more stock for a profit. These are a few examples of how the SKU rationalization process increases your profitability.

Builds brand identity

You’d want to build a brand name when building a product that’s perfect for a certain customer demographic. SKU rationalization varies from product to product and company to company. In this case, you can uniquely advertise your company’s product which will be unapproachable by competitors. For example, if you’re providing the SKU of a phone to advertise a special discount, you will not show the same to other companies. Hence, your competitors will not be able to match your price and poach your customer base. This helps to build a brand name. 

How to Rationalize SKUs

The usage of SKUs has grown drastically. Research has revealed that in 2014, SKUs increased to 40000 from 6000 SKUs in the 1970s.

SKU codes are similar to barcodes but offer more diversity. Barcodes are similar for a certain product wherever they are being sold. However, in the case of SKUs, they are different stores and have their own unique SKU rationalization process. That’s why there is no universal approach to the SKU rationalization process. 

You will have to keep a few things in mind to create SKU codes that will be easily conceivable to vendors, sellers, and your employees.

Consider your target market and any other variables

The first and most important part of SKU rationalization is properly analyzing your target audience and their product preference. Your company’s USP should be built based on market research, and all your products should reflect that central value. 

The question you must ask when you rationalize SKUs is: 

• Who is your target audience, and what products are they interested in or need? For example, if your target audience is parents of small babies and toddlers, you should have more products, like diapers, toys, baby food, or hygiene products. 

This way, it’ll be easy to decide which products you should discontinue.

Perform a detailed SKU analysis

You need to monitor your sales data continuously. When your supplier and inventory costs factor into your sales data, that will tell you which SKUs give you good returns. Additionally, you will have to analyze whether a few characteristics apply to your SKUs stocking. You will need to notice if a particular SKU has a long lead time, requires higher packing and picking labor, low inventory turnover, high storage space need, and more. If an SKU has any of these characteristics, you’ll have to consider removing them.

Consider other variables that could affect the results

When you are factoring the characteristics of your products into your sales data, you will need to consider some outer variables as well. An example of such variables is when you put out advertisements about a product promoting it, boosting sales of that particular product. You might introduce a new product similar to the existing one, which could cause a drop in old product sales. Your competitor might also introduce such a product which can cause a drop in sales for your product, so you will have to keep track of your competitors’ activity.

Organize your product catalog

Research and development sessions with your company employees are important before rationalizing SKUs. The sole reason is that the work becomes clearer and less time-consuming for employees. You need to develop a system to ensure common product catalogs. For example, you can divide the products into categories, like ‘discontinue’, ‘reassess’, or ‘continue’. This way, your employees will avoid any errors regarding a particular product, and there will be necessary clarity when you are also carrying out your audit.

Review the results

There are fair chances that categorizing your products might give you the desired results. To be sure, you have to alter your strategy. That is the next step of your SKU rationalization process. You will have to review your company’s recent financial data and check whether the SKU rationalization process has reduced your operational costs. If these have occurred while your revenue has stayed the same, then your SKU rationalization has been successful. 

Repeat the SKU rationalization process periodically

Repeating the process is the last and necessary step in your SKU rationalization process. You have to consider numerous variables during the process change all the time. That is why it is important to audit your stock and inventory every six months. This way, you will keep your operational and inventory maintenance costs to a minimum. However, be careful and wait for enough data to accumulate over a specific period. This will help you audit your inventory more accurately and easily.

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