What Is SKU Rationalization?
SKU Rationalization is a process of reducing the number of stock-keeping units (SKUs) in a product portfolio to improve inventory management and reduce cost. This also results in financial benefits by increasing sales, improving operations, reducing costs, and increasing profitability.
Anyone involved in inventory adjustments should have a thorough understanding of their company’s strengths and weaknesses. SKU code rationalization is especially important if you sell on an online marketplace where profitability is dependent on high order volume.
SKU Rationalization as a Tool of Inventory Management Technique
SKU Rationalization as a Tool of Inventory Management Technique SKU rationalization is a cross-functional inventory management technique used to increase profitability.It matters a lot in inventory management because changes to the product catalog and SKUs directly impact days inventory outstanding (DIO), which is the number of days inventory is held before it is sold. The longer you keep inventory, the higher your carrying cost.
Businesses that use SKU rationalization can be confident that they are on the right track. Time to focus on your inventory requirements will help your business thrive, and profits grow.
Objectives for SKU Rationalization
Now that you understand why businesses use SKU rationalization, you can develop your strategy. This is one area of business where diligence is more important than creativity, so it’s beneficial to learn from what others have done. On the other hand, a little out-of-the-box thinking gives a strong strategy the extra boost it needs to succeed.
The following are the top seven objectives for an effective SKU rationalization methodology:
- Revamp your marketing strategy. Although it may appear to be a disjointed approach, reviewing your eCommerce marketing strategy or wholesale marketing plan is critical. The product purchases you make are influenced by the type of customer you attempt to reach. If your company is purchasing goods that do not increase sales, your marketing is likely ineffective. Examine your core marketing approaches and the types of buying patterns they produce.
- Examine recent sales figures. Obtain sales records for the previous 90 days before refreshing SKU counts. This means you’ll make data-driven decisions about which SKUs to keep rather than simply following your gut instinct. While you probably know your business well, the more successful you become, the more difficult staying in touch with your customers’ needs. You might be surprised to learn which products are performing well and should be phased out.
- Ask your customers what their favorite products are. After your sales figures have revealed the most significant trends, ask your customers what they are most interested in. Allowing your buyers to directly influence future inventory has a far greater impact than you may realize. This is especially important if you sell online, as BlueCart eCommerce does. It also gives customers the option to make specific product requests. Your survey results will increase your sell-through rate, fill rate, and inventory turnover ratio over time.
- Reclassify all of your products. This is the difficult part. It’s much easier to reclassify products when you know which ones are succeeding and which ones aren’t. Sort SKUs into keeping, unsure, removing, and new products to add the same way you would with spring cleaning. Unsure products can be reevaluated later based on seasonality or kitting relevance. The new products must be integrated into all aspects of your business, from financial forecasting to your warehouse management system.
- Estimate the rate of sales cannibalization and switching. These terms can be perplexing if you’ve never heard them before, so let’s go over them one by one. When an existing product loses sales due to the introduction of a new one, this is called sales cannibalization.
- Revisit your financial projections. Regarding financial analysis, updating financial and business goals is a critical component of SKU rationalization. Sales will fluctuate whenever you change the products you offer and how much they cost. Higher-value SKUs should result in more sales in most cases, but you should test this on a trendline first. If future sales do not exceed the new cost of goods sold promptly, you will need to cut costs elsewhere.
Benefits from SKU Rationalization.
Having a couple of boxes of unorganized merchandise may be unavoidable at times. However, if you have several boxes taking up unnecessary space, this will impact your daily efficiency. Your warehouse process flow shows where each pallet should go, but your company’s needs may change over time. You can also greatly simplify warehouse staff members’ work by keeping a list of only valuable SKUs.
- Profitability has increased.
Making more money is one of the most significant advantages of SKU rationalization, and you can scale faster if you only keep products that drive business growth. Thorough SKU rationalization also reveals consumer trends, allowing you to stock more of the buyers’ products. This results in a snowball effect in which your most profitable products lead to exponential growth and brand relevance.
- Inventory Write-Offs Reduced: By removing slow-moving goods from your inventory profile, you may reduce inventory reserves and future write-offs, which will have a direct effect on EBITDA.
- Vendor Rationalization: By identifying your strategic items, you may be able to eliminate the requirement to source from several suppliers. Purchasing more items from fewer suppliers might help you lower unit costs by purchasing in larger amounts from those providers. By developing deeper connections with fewer providers, you may be able to negotiate lower rates and/or payment conditions. This has the potential to boost both gross margin and working capital.
- Improved Working Capital Metrics: Increasing inventory turnover may be achieved by optimizing your SKUs. Inventory will spend less time on the warehouse shelf and convert into sales more quickly.
- Increased Access to Capital: Many businesses employ asset-backed loans, with accounts receivable or inventory serving as security. When assessing line of credit limits, lenders often eliminate past-due receivables and outdated goods from their calculations. Having access to money during tough times will be vital to satisfying responsibilities to both workers and consumers.
- Improved Customer Satisfaction: Maintaining a better inventory mix will result in higher customer satisfaction due to fewer stock-outs and more efficient order delivery. Strong customer connections may help your business survive even in challenging economic times.
- Reduced Labor Costs: Eliminating slow-moving things means spending less time storing and maintaining slow-moving products and repurposing that labor to transport orders to consumers, shortening order fulfillment time.
- Inventory Write-Offs Reduced: By removing slow-moving goods from your inventory profile, you may reduce inventory reserves and future write-offs.
- Vendor Rationalization: By identifying your strategic items, you may be able to eliminate the requirement to source from several suppliers. Purchasing more items from fewer suppliers might help you lower unit costs by purchasing in larger amounts from those providers. By developing deeper connections with fewer providers, you may be able to negotiate lower rates and/or payment conditions. This has the potential to boost both gross margin and working capital.
- Improved Working Capital Metrics: Increasing inventory turnover may be achieved by optimizing your SKUs. Inventory will spend less time on the warehouse shelf and convert into sales more quickly.
Conclusion
As the company continues to grow it’s important to ensure a healthy bottom line. This can be achieved through SKU rationalization, where we look at each product/service and its contribution towards the overall business. So keep updated thanks.