What is SKU Rationalization and How to Use It Properly?

Because business environment is becoming more complex, we will show you how to use SKU Rationalization to reduce costs and complexities from your supply chain.

The Impact of Too Many SKUs
In traditional business sense, it is always good to have many products for customers to choose from. However, having too many stock keeping units (SKUs) can become a complex business operations. Because, too many products will lead to too many suppliers, too many data to collect and analyze, too many people to control, too many machine used to make products and too many storage space required.

What is SKU Rationalization?
SKU Rationalization is sometimes called Product Rationalization. Inside nutshell, it is the decision making process to determine if a particular product should be kept or discontinued.

SKU Rationalization in Action
Since there are so many factors come into play, then we would like to offer some guidelines for SKU rationalization project as below,


sku rationalization graphic


1. Select Product Categories
SKU rationalization project is not the job of inventory control people alone and cross functional team is required. Establishing the clear project boundary is the key to success. At this stage, you pick which product family or category or brand you would like to review. 

2. Identify Market Segment
Sometimes one product category may serve many customers. Then it may be necessary to know which market segment or sales channel we are focusing on. So project scope can be narrowed down further. 

3. Make a List of Strategic Products
At this stage we try to identify SKUs that we would like to keep. Then, you need to collect data of each SKU such as demand, profitability and common packsizes. 

4. Review All Other SKUs
In order to eliminate bad SKUs without sacrificing the value to customers, a company should try to find one or more of product characteristics as below, 

Demand
- High stockout
- High shrinkage
- High product returns
- High packsize variety
- Erratic demand
- Demand declines in recent 1-2 years
- Low margin but consume big shelf spaces

Production
- High setup time
- High labor processing
- High defects 
- Low inventory turns 

Supply
- Long lead-time
- Strict import control 
- High currency risk 

Do you need to know these demand/production/supply characteristics? Consider an item with average sales volume with long lead-time and demand fluctuation. Do you really want to keep this item?

When you know all aspects of each item, it's easier for a team to make the objective decision whether to keep the items or eliminate some of them.

5. Eliminate Unnecessary SKUs
The final step is to trace SKUs you want to eliminate back to their raw materials , WIP and all related finished goods.

Conclusion
As you can see, when you do SKU rationalization project properly, you can reduce numbers of suppliers you have to deal with, unnecessary machine setup time, unnecessary storage requirements. You can also free up your manpower so they can focus on some other things more productive.