Brands have to work on continuous reevaluation of their product lines and optimize their inventory according to profitability. As a business owner, you would look for opportunities to boost inventory management alongside maximizing the cash flow. Interestingly, SKU rationalization could help business owners understand their existing stock levels and introduce necessary measures for optimization. The rationalization of SKUs or Stock Keeping Units can potentially influence different aspects of the supply chain or business performance management. The following post helps you learn about the rationalization of SKU, its benefits, and best practices.
What is SKU Rationalization, And Why Is It Essential For Businesses To Implement?
Before identifying the answers to "what is SKU rationalization," you must learn about the basics of SKU. The Stock Keeping Unit or SKY is a unique alphanumeric code used within a business for tracking and organizing inventory items. Every Stock Keeping Unit offers details regarding the defining characteristics of a product, such as the style, price, and brand.
The rationalization of SKU in supply chain primarily involves examining the existing products, followed by eliminating the underperforming SKUs. The rationalization of SKUs is essential for businesses as it can help identify the items they should retain or remove from their inventories for cost optimization.
The rationalization of SKUs determines product profitability through analysis of relevant data, such as storage space fees and historical sales data. The biggest reason for SKU rationalization in businesses is balancing inventory management and improving operational efficiency.
The Benefits of SKU Rationalization
Businesses need to work on rationalization of SKUs to achieve significant value benefits.
Improved Inventory Management
Too many SKUs can result in excess and obsolete inventory, which ties up working capital and decreases profits. By reducing the number of SKUs, companies can more effectively manage their inventory levels and minimize waste.
Fewer SKUs also mean lower production costs since there are fewer unique items to produce. In addition, storing and shipping fewer SKUs can also lead to significant cost savings.
Improved Product Quality
When a company focuses on fewer SKUs, it can often enhance the overall quality of its products. This is because companies have more resources to invest in research and development and can better control the manufacturing process when they aren't producing a large variety of products.
Increased Customer Satisfaction
The above factors - improved inventory management, reduced costs, and improved product quality - can lead to increased customer satisfaction. Happy customers are more likely to continue doing business with a company and to recommend its products to others.
When done correctly, SKU rationalization can be a significant boon to a company in terms of cost savings and increased customer satisfaction. If you're considering rationalizing your SKUs, work with experienced professionals who can help you make the best decisions for your business.
Related: 7 Types Of Inventory Risk And What They Mean For You
How To Go About Implementing A Successful SKU Rationalization Plan?
There are a few key steps that you'll need to take to implement a successful SKU rationalization plan:
1. Define your goals: What do you hope to achieve by rationalizing your SKUs? Do you want to reduce costs, improve customer satisfaction, or both? It's essential to have a clear idea of your goals from the outset to ensure your SKU rationalization plan aligns with them.
2. Analyze your current SKU portfolio: Once you know what you want to achieve, you'll need to look closely at your current SKUs to identify which ones should be kept and which ones should be removed. You'll need to consider several different factors, such as sales volume, profitability, customer demand, and production costs.
3. Develop a plan for discontinuing SKUs: If you've decided to stop certain SKUs as part of your SKU rationalization plan, it's essential to have a clear plan. This should include giving customers advance notice, offering alternative products, and managing inventory levels.
4. Implement your plan: Once you've developed your SKU rationalization plan, it's time to implement it. This will involve making changes to your product line, which can be complex and nuanced. As such, working with experienced professionals who can help you navigate the implementation process and ensure everything goes smoothly is essential.
5. Monitor and adjust as needed: After you've implemented your SKU rationalization plan, it's essential to keep an eye on things and make adjustments as needed. This includes monitoring sales volume, customer satisfaction, and other relevant metrics. If you find that certain SKUs are not performing as well as you'd hoped, you may need to make changes to your plan.
Following these steps, you can develop a successful SKU rationalization plan to help you achieve your goals. However, it's important to note that SKU rationalization is a complex and nuanced process. As such, working with experienced professionals who can help you navigate the process and ensure everything goes smoothly is essential.
What Are the Metrics to Measure Success for SKU Rationalization?
There are several different metrics that you can use to measure the success of SKU rationalization. Here are a few of the most important ones:
1. Sales volume: One of the most important things to keep an eye on is sales volume. This will give you a good idea of how well your SKU rationalization plan works. If you find sales declining, it may be time to make some adjustments to your project.
2. Customer satisfaction: Another critical metric to track is customer satisfaction. This will give you a good idea of how well your customers are responding to the changes you've made to your product line. If you find that customer satisfaction is declining, it may be time to make some adjustments to your SKU rationalization plan.
3. Inventory levels: It's also essential to monitor inventory levels. This will help you ensure you're not overstocking certain products and can meet customer demand.
4. Costs: Finally, you'll also need to monitor costs. This includes production costs, shipping costs, and inventory carrying costs. By keeping an eye on these metrics, you can ensure that your SKU rationalization plan is cost-effective.
By tracking these metrics, you can get a good idea of how well your SKU rationalization plan is working. If you find that one or more of these metrics is declining, it may be time to make some adjustments to your project.
Tips for Reducing Inventory Costs
Apart from the benefits of Stock Keeping Unit Rationalization, businesses must maintain control over inventory costs. Here are some critical best practices for the effective reduction of inventory costs.
- Detailed SKU rationalization analysis is essential for identifying the right areas for optimization.
- Always focus on determining the right reorder points.
- Avoid overstocking and try to get rid of unwanted items from inventory.
- Choose a reliable inventory management software.
Related: 3 Best Practices To Increase Your Conversion Rate With Warehouse Inventory Management
The Importance Of Accurate Data In Making Informed Decisions About Product Lines
Market research and SKU analysis can deliver the value of informed decisions regarding the organization of product lines. Accuracy is essential for the analysis of SKU count and sales data. The in-depth SKU analysis could help find details about long lead times, high return rates, and limited inventory turnover. The classification of SKUs based on rationalization analysis findings can help better organization product catalogs.
Challenges That Can Arise During The SKU Rationalization Process And How To Overcome Them
Several different challenges can arise during the SKU rationalization process. Here are a few of the most common ones and some tips on how to overcome them:
Resistance From Employees
One of the most common challenges companies face when rationalizing their SKUs is employee resistance. This is especially true if employees are worried about losing their jobs. Communicate with employees and explain why SKU rationalization is necessary. It's also important to support employees during the transition.
Resistance From Customers
Another common challenge is resistance from customers. This can happen if customers are unhappy with the changes you've made to your product line. Communicate with customers and explain why SKU rationalization is necessary. It's also important to support customers during the transition.
Another challenge that can arise during SKU rationalization is implementation issues. This can happen if you're not prepared for the changes that need to be made. Working with experienced professionals who can help you navigate the process and ensure everything goes smoothly is essential.
Finally, the cost is another challenge that can arise during SKU rationalization. This includes production costs, shipping costs, and inventory carrying costs. It's essential to track these costs carefully and ensure that your SKU rationalization plan is cost-effective.
By being aware of these challenges, you can be better prepared to overcome them if they arise.
If you're looking for ways to improve performance and save money, SKU rationalization may be the solution you're looking for. In this blog post, we've discussed some of the benefits of SKU rationalization and provided tips for getting started. Ready to give it a try? Your new all-in-one, 3PL management tool is just a phone call away!
Recommended: SKU Profitability: A Formula For Sustainable Growth Rate