The Complete Guide to Understanding SKU Rationalization

Stock-keeping units, or SKUs, are crucial tools for inventory management. They provide identification for your products and help businesses keep track of available inventory. You can also use them to track sales trends, optimize future items and improve the customer experience at your stores.

However, managing the number of SKUs in your inventory is important. Focusing too much on expanding inventory might result in extraneous products and a lack of profit. With a process called SKU rationalization, you can optimize SKUs and eliminate products that underperform or don’t sell at all. In turn, you can maximize profits and maintain your inventory more efficiently.

Read on for more information about the SKU rationalization process and how it can help your business.

What Is SKU Rationalization?

Retail businesses’ top priority is the promotion and sale of products. As companies grow in popularity and expand their customer base, they might also grow their product inventory. While introducing new items can be highly beneficial for businesses, adding too many new SKUs can cause overstock. If products undersell, you could lose money in production costs. They could also overflow your inventory, making inventory management more challenging.

SKU rationalization is the process of analyzing your current inventory and getting rid of products that aren’t selling well. During your analysis, you can decide which products to add, remove or keep in stock. By removing underperforming products, you can improve your inventory organization. SKU optimization allows you to focus on high-demand products, which increases profits and customer satisfaction.

For example, technology vendors use SKU rationalization as new items debut. Electronic retailers remove outdated or unpopular items from their inventory as they make room for the latest upgrades. They might pull headphones or cellphones from a certain date, such as three or more years. Customers are likely more interested in the newest editions, so removing older iterations doesn’t impact their preferences.

Why Is SKU Rationalization Important?

The SKU rationalization process is essential for multiple reasons:

  • Reduces expenses: If you have too many products available, you’ll likely have to pay multiple suppliers and additional shipping fees. When you only focus on the products that sell well, you can maximize profits and keep your warehouses from overcrowding. Essentially, you focus on the products that drive growth for your business.
  • Streamlines inventory process: Effective inventory management is crucial for all businesses. You can ensure accurate stock levels and provide an enhanced customer experience. With SKU rationalization, you maintain a manageable and profitable stock. The inventory is much easier to manage when you don’t have extraneous items.
  • Optimizes your catalog: Lastly, SKU optimization allows you to enhance your catalog. You can set your business apart from competitors by offering the most popular products and eliminating outdated ones.

The Benefits of SKU Rationalization

A consistent analysis of your products offers many benefits. SKU rationalization allows you to measure the profitability of each product in your inventory. You can use these metrics to enhance your business in many ways, including:

  • Raising profits: If a product doesn’t result in a net profit, it might cause your company to lose money overall. From shipping costs to storage space, each item costs additional prices. And with fewer options on your shelves, customers might be able to make purchase decisions more confidently. You can avoid handling fees for extraneous products while enjoying increased sales. Overall, SKU rationalization is an excellent option if you want to increase earnings.
  • Improving efficiency: The fewer SKUs you have, the less time you have to spend on production and shipping. A more organized warehouse leads to quicker turnaround times, so your customers receive products quickly. Your business can streamline many packaging and distribution processes with fewer items to manage. In turn, your efficiency improves, and customer satisfaction rises.
  • Strengthening brand awareness: If your business carries leading products and brands, you can enhance your brand’s reputation. Inventory efficiency leads to quick distribution times. When customers receive high-quality products quickly, their satisfaction grows. And the happier your customers are, the more likely your consumer base will grow.

How to Optimize Your SKUs

If you want to optimize your SKUs, it’s best to make a plan first. Here are steps you can take for SKU rationalization:

  1. Identify your target audience: It’s wise to start with your intended audience. Consider the values of your customers and your business. Products that align with these values are more likely to sell consistently because customers will be more interested. You can use these values as you analyze your products for optimization. 
  2. Analyze SKUs: Next, it’s time to analyze your current SKUs for their profitability. For each SKU, monitor its storage costs, production times, future sales projections, labor costs and popularity. Afterward, you can use the results to decide which products to remove or keep. For example, if an item has high storage and labor costs but poor selling performance, you might choose to remove it from your inventory. But if a product sells extremely frequently and has high sales projections, you would probably keep it in your stock.
  3. Organize product catalog: As you alter your product inventory, it’s also a good idea to reorganize your catalog. If you remove an item, make sure to eliminate it from all online or in-store inventory logs to reduce customer confusion. As you implement new items, group them with similar products to maximize organization. An organized catalog can also help you notice which items need replacements due to lack of variation.
  4. Track performance results: Lastly, you should closely track product performance after your catalog edits. Check whether your alterations helped with storage optimization, profitability and operational costs. 

You should perform SKU rationalization once or twice a year to ensure inventory optimization. Performing it consistently also allows you to track sales projections and other significant business data. This method is beneficial for streamlining inventory processes and increasing your profits.

Lower Your Inventory Management Costs With Finale Inventory

SKU rationalization is a crucial method for inventory management. And with proper inventory management, you improve your business’s efficiency overall.

Finale Inventory offers a variety of inventory management solutions, including our Cloud Inventory Management system. This web-based software streamlines your inventory processes, keeping all of your important data in one secure place. From sales analysis to barcode management, this software can help you reduce inventory costs and improve efficiency.

To get started, schedule a free demo with Finale Inventory today.