SKU Rationalization: What Is It and How Is It Being Used?

By Matthew Wright

SKU Rationalization: What Is It and How Is It Being Used?

  • April 30, 2020

SKU Rationalization: What Is It and How Is It Being Used?

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Specright Founder & CEO Matthew WrightThe “build it and they will come” mentality is taking a negative toll on companies, particularly as they struggle to identify underperforming products and simplify their portfolio. In the past, SKU (Stock Keeping Unit) proliferation was a viable path to growth as companies focused on expanding their product offering to customers. 

Now, as efficiency, sustainability, and cost optimization continue to be top priorities among organization leaders, companies are turning to SKU rationalization to help companies better control product portfolios and improve their bottom line.

What Is SKU Rationalization?

In the past, SKU proliferation was the answer to ever changing consumer demands, market shifts, and globalization. For example, the average grocery store in 1970 carried about 7,000 SKUs compared to a modern-day market which typically has over 40,000 SKUs. And while the number of SKUs exploded exponentially, the methods of managing them didn’t evolve. A lack of SKU management tools and processes has made it difficult for companies to manage their growing number of SKUs in a profitable way, which has led executives to search for alternative ways to drive growth and cost savings.

Now, many companies are turning to SKU rationalization, which is a method used to reduce the number of SKUs or underlying component parts based on underperformance, duplication, or obsolete product statuses. 

As it turns out, some SKU proliferation is in fact accidental and often the result of companies not having adequate systems to manage product specifications beyond the Bill of Materials level. As a result, many organizations end up experiencing greater inventory and holding costs, all that can stack up additional time and inefficiencies. For example, a packaging company we work with found they had hundreds of packaging types within inches of one another that could be consolidated to save money. This was because each time a packaging engineer went to create a new package, there was no visibility into what already existed today, thereby creating more and more similar SKUs on accident. This is not only inefficient, but costly. Maintaining inventory in storage, for example, can eat up as much as 40 percent of a given product’s profits each year. 

How Big Brands Are Using SKU Analysis

Brands across industries are prioritizing SKU rationalization in efforts to innovate the supply chain. For example, CPG company Procter & Gamble consolidated and eliminated around 100 brands over the past two years to focus on its top 80-90 product lines. Their findings concluded that the brands they shed contributed about 6% of the company’s total profit. Unilever told a similar story in that the variety of UK and Ireland SKUs accounted for 20% of their inventory, but only about 5% of sales. 

Toy company Mattel recently announced a commitment to reduce SKUs by 30% before the end of 2020, particularly in their Barbie and Hot Wheels color options. And just last year, the company’s two-year supply chain simplification strategy saved the company about $797 million by inspecting and mapping its supply chain on a granular level. 

Kraft Heinz has also announced its intentions to review each SKU for sales volume and profitability and eliminate those that do not meet expectations. The ultimate goal is to confidently determine which SKUs you can and can’t do without in order to increase cash flow and maximize on-hand resources.

How to Implement an Iterative SKU Rationalization Program with Specright

Avoiding the high costs of SKU proliferation requires more than just looking at bottom line sales data. Today, most companies execute SKU rationalization by compiling spreadsheets and performing detailed analysis on a one-time basis. By implementing specification management, companies can continuously consolidate SKUs and prevent future proliferation. By gaining DNA-level insights into their products and SKUs, companies can link raw materials, packaging specs, and other supply chain data to help eliminate net-new proliferation and organically reduce their overall number of SKUs.

Specright is helping accelerate SKU rationalization efforts by providing a scalable, intelligent Specification Data Management™ platform with built-in SKU consolidation capabilities. Learn more about Specright and Specification Data Management software by downloading our executive briefing on how Specright simplifies SKU inventory with confidence.