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Have you been hearing the buzz about SKU rationalization and wondered what is that and why is everyone out there talking about it? The “skew” or SKU is an acronym for Stock Keeping Unit. It is a unique code that is found on the product bar coding label that identifies a product.
The SKU code contains information about the product like product variations (green shirt, blue shirt, red shirt) cost of the product and manufacturer of the product. There are thousands and thousands of these codes that are generated for products.
The SKU is scannable. A scanner reads the code and delivers all the information a retailer or stock person needs abut the product. The SKU helps to easily manage your inventory and create n inventory hierarchy for easier inventory management.
They are used for both inventory management and tracking of sales. They collect the data that tells retailers how well products are selling, which products are selling quickest, and when it is time to restock inventory.
All this information helps retailers to recognize the product mix, and finally this is where SKU rationalization becomes a part of the mix.
What is SKU Rationalization?
SKU rationalization is used to help retailers and other concerned parties determine which products they should keep on the shelves, which products they should be ordering more of, which products they should order less of. It can help to eliminate waste, reduce inventory, and reduce costs.
SKU rationalization frees businesses up to focus on the products that meet their customers demands. SKU rationalization is often called SKU optimization which in turn is stock optimization. SKU rationalization methodology is easy to implement and can really make a difference in how you do business.
It has made a huge difference for the giant Unilever (the number one producer worldwide of household goods). They implemented the SKU rationalization process and reported great success with the model. As a matter of fact, it is not only Unilever that is using a SKU productivity formula. Many, many, companies that have thousands of products (Amazon, Proctor & Gamble) are using this method to manage their products.
The Birth of SKU Rationalization
There are more SKUS in the market today then there has been at any other time. Most people know that they are used in retail outlets, but the retail sector is not the only place that they are used. Suppliers depend on SKUS too.
The thing about SKUS is that they are not universal, they are unique, which means that vendors can easily track their specific products throughout the supply chain, which is why many suppliers use them as well. They are a convenient method of tracking what is happening in the supply chain.
SKUS have changed how the world does business. They can be used to track warranty information, repairs as they are being made, and services that are available with the item. For example, a TV’s SKU can contain all the information you need to know about it to make an informed buying decision, and it can also help to keep the manufacturer up to date about the frequency of problems with that particular model.
The growth of the use of SKUS has grown exponentially. For example, in the 1970s there were about 6,000 SKUS, by 2014 there were about 40,000 SKUS, today SKUS are found on most products and more are being generated all the time. Any time a flavor is added to a line a new SKU is generated or if there are some features that are upgraded a new SKU is generated. Uniqueness is vital to how SKUs work for a retailer and the supplier.
We got a little sidetracked there. Let’s get back on track with SKU rationalization and why it works. The reason SKU rationalization is such a big hit and more companies are incorporating it into their business model is because more SKUs can mean an unnecessary cost.
Here is a good example of why SKU rationalization works. Let’s say you have a grocery store and you carry a specific brand of yogurt that has added a new flavor to the line. After reviewing sales for a month, you realize that the new flavor is selling far better than the old flavors, but they are still selling. Next month instead of ordering a large amount of the old flavors you adjust your order to reflect the demand for the new flavor.
After another month or two if sales drop further for the old flavor, then you just don’t carry it anymore. Why? Well it can get costly to carry a product that is dropping in sales. For example, on average it costs about 20% to 40% to hold inventory in storage, which by doing some simple math can show that you are losing about 20% to 40% of any product that is sitting in storage waiting to be sold.
How Doe SKU Rationalization Work?
Largely up to this point it has been the bigger brands like Unilever and P&G and other brands that have really tapped into the power of SKU rationalization, but that does not mean that any business cannot stand from gaining by deploying the same methods.
Let’s look at what P&G did. Through brand rationalization using SKU rationalization. P&G dropped about 60 brands over a year and a half. Why? Well, while these brands that did not make the cut accounted for about 5% of P&G’s revenue the SKU rationalization was a cost savings more that freed up cash flow.
Cutting the brands that were not cutting the muster lowered DIO (days of inventory outstanding) from about 80% to 58%.
Unilever has been on track with SKU rationalization for about a decade now. They did an audit and found that the variance in their SKUS in the UK accounted for about 25% of the inventory but only accounted for about 5% of their worldwide sales. They set a goal to reduce their number of SKUS by about 25% and have worked steadily towards reducing SKUS for the last ten years.
You may be thinking that your business has little to do with P&G and Unilever, but the fact is you can use the same SKU reduction methods to get your inventory under control and increase positive chase flow. Monitoring your sales using SKUS can help you to get rid of products that are not selling well and ante up on the number of products that you have in inventory that do sell well.
Simple SKU Supply Chain Recommendations
While SKUS are a great component of any supply chain they do come with some downsides or negative, like having too many SKUS to manage. A SKU rationalization analysis can help to reduce the number of SKUS and help to remove products from the supply chain that are obsolete or no longer necessary to fulfill the supply chain needs.
The SKU definition in supply chain activities have a different SKU rationalization definition than the retailers. In the supply chain SKUS are not really used to determine sales information but instead are used for tracking purposes and inventory management, which it has in common with retailers.
Using SKUS in the supply chain and ultimately eliminating SKUS from the supply chain can help to create a lean optimized supply chain. For example, let’s say that you manufacture coats. You have moved your product line around a bit and while for the last ten years your manufacturing has required 7 different SKUs for buttons.
However, you have found that one button is so much like another button that they can be used interchangeably without really making a difference to the product. You can easily eliminate one of those SKUS. Of course, this is just an example and it is on the smallest scale.
There is likely many SKUS that are overlooked, forgotten about, or ignored long after they should have been discontinued. The truth is while buttons used in the example above are not going to take up tons of space in your manufacturing plant, there are other products that will.
Paying attention to SKUS and using them for all they are worth can help your business to cut the fat and become highly optimized whether your business is manufacturing or retail.
Why Are More Businesses Not Using SKU Rationalization?
Of course, with all this talk about the benefits of SKU rationalization, it only stands to reason, that many more businesses would be on board with using this model. Why are more businesses not using this model?
The fact is that there has been an uptick in SKU rationalization over the last few years, that is what brought you here. The word has gotten out slowly about the power this method has to offer, but now that the word is out, you will see more and more businesses jumping on the bandwagon and taking advantage of SKU rationalization.
Hurry and get on board!