What is SKU, SKU Rationalization and SKU Optimization?

What is the difference between SKU Rationalization, SKU Optimization and Product Realization? How can it reduce costs and complexities of your supply chain?

What is a SKU?
"SKU stands for Stock Keeping Unit. It is the identification of a product or service using alphanumeric code. Each product will have its own SKU code so customers can tell the difference. For example, one product with 3 different labels should have 3 different SKU codes. Then, SKU code is used to track how many product variants the company has."

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

What is SKU Rationalization?
"SKU Rationalization, also known as SKU Optimization or Product Rationalization, is the decision-making process to determine if a particular product should be kept or discontinued. So the company can reduce inventory costs and cut down on complexities in procurement, production and distribution processes."

SKU Rationalization Process
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 pack sizes. 

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 stock-out
- High shrinkage
- High product returns
- High pack size 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 an 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.


Related Article: What is Inventory Management and Control?