SKU Rationalization: What It Is & Why It’s Important in Order Fulfillment
Though SKU proliferation is not discussed nearly as often as it was even just a few years ago, it is a phenomenon that order fulfillment operations and retailers continue to reckon with on a daily basis.
As product lines and entire product families continuously expand in order to meet customer demand and expectations, many warehouses, distribution centers, and other facilities are finding it challenging to accommodate all of these additional SKUs. After all, adding even a single SKU has the potential to impact many aspects of the supply chain, from replenishment to slotting to tracking, and everything in between, especially if the new SKU is drastically different in size or dimension than what has been offered until now.
Need an Expert Opinion?
It’s for this reason that every order fulfillment operation should understand SKU rationalization, and do their best to build it into their workflow.
What is SKU Rationalization?
SKU rationalization is the process of analyzing the impact to an operation that will come from adding, discontinuing, or maintaining a particular product or product line.
The goal is to understand this impact, and to use it to rationalize, or justify, the course of action that is ultimately taken—whether that be to add a product, discontinue it, or continue as is.
At its heart, SKU rationalization requires an operation to understand the performance of its existing SKUs (a process also known as SKU profiling). By understanding how your existing SKUs are performing and what percentage of revenue they contribute, it is possible to determine which, if any, products can be discontinued without impacting your overall profitability, while also offering insights into how new (similar) SKUs may perform.
Combined with other available data (such as customer surveys, market sensing, etc.), this will allow for smarter business decisions across the board, allowing a business to adjust its product catalog in order to remove products with little-to-no impact on revenue, while only adding products that can demonstrate true value, which brings a number of benefits to an operation:
- Reduced inventory levels
- Reduced carrying costs
- Less shrink due to a product growing outdated
- A simplified slotting process
- Improved total order cycle time and order accuracy
- Simplified palletization, packing, and shipping processes
- Simplified replenishment processes
- An increase in inventory forecast accuracy
Balancing Competing Needs
For most businesses, questions about inventory—which products are offered, stocked, and sold—are not something that can be decided upon unilaterally. Though the operations and supply chain team might seek to eliminate excess or under-performing inventory by means of rationalization, other departments and business units (for example, Sales & Marketing) might seek to expand offerings in order to attract new customers and retain existing ones. In order to be successful, an operation must balance these often competing needs.
Though the operations team may not be the final word on whether or not it makes sense to add, continue, or discontinue a product or product line, it is still their responsibility to make other business units aware of the costs associated with inventory and SKU proliferation. And even if the number of SKUs cannot be reduced or paired back, there may still be steps that can be taken to improve inventory efficiency, reduce costs, and boost profitability.
1. Conduct an analysis.
Even if there is little to no chance that an analysis will result in a decision to reduce the number of SKUs that your business offers, steps should be taken to put in place a measurement and analysis strategy.
Conducting a SKU Analysis and profiling exercise can help you determine what product moves and what doesn’t, what product is likely to sell with others (product affinity), and generally understand which product accounts for the greatest percentage of your sales—information that you can use to inform other important decisions about your operation, as seen below.
2. Use this analysis to inform your slotting process.
Slotting is the process of organizing your inventory within your warehouse of distribution center. By optimizing your slotting process so that inventory is stored in the most efficient location within your facility—taking into account turnover rates, product affinities, etc.—it is possible to reduce the amount of time that workers spend traveling to pick orders, ultimately reducing labor costs and enabling you to meet the ever-increasing demands of omni-channel fulfillment.
3. Embrace automation.
Automated technologies each bring with them their own benefits that can help you address the various challenges associated with SKU proliferation and general inventory management. For example:
- Warehouse Execution System (WES): To allow for more intelligent communication between all of your systems, while also streamlining receiving, replenishment, shipping, and other processes.
- Automated Storage and Retrieval System (AS/RS): Vertical Lift Modules (VLMs) in particular can be used to put away inventory in the ideal location to save space in warehouses struggling with physical capacity.
- Automated Packaging & Shipping System: Automatically packing orders for shipment allows for items to be packed in the tightest possible package, reducing their dimensional weight and saving your operation substantial shipping costs.
The Bottom Line
Even if it is unlikely that your analysis and recommendations will lead to a reduction in the number of SKUs offered by your operation, SKU rationalization should be an ongoing part of operation and supply chain management. By understanding the costs of SKU proliferation, it is possible to make more intelligent business decisions regarding adding or discontinuing product, and to make investments in technology that can help you become more efficient and productive.
A skilled systems integrator can help you conduct this analysis and determine the best possible path forward for optimizing your operation.