What is SKU Rationalization and Why is Everybody Doing it?

Big corporations are getting better performance from their inventory with SKU rationalization. The process has become a trend across companies of all sizes.

Organizations use SKU (or product) rationalization to decide what items to keep, reduce or eliminate in inventory, based on historical sales data, weighing the cost of producing and stocking against the benefit of selling each product.

Rationalization, in short, helps frees companies to spend time and money on the products that work best. It’s a kind of inventory optimization.

From Proliferation to SKU Rationalization

There are more SKUs today than ever, especially in the retail sector. One report states that grocery stores, for example, carried 7,000 SKUs in 1970, a figure that soared to more than 40,000 by 2014.

The boom is due to companies matching products to more particular customer preferences. Variations, like a low-fat version of a food product, contribute to the SKU proliferation, but so does shorter development cycles, which piles new inventory on top of old to anticipate rapidly changing tastes.

The problem is that more SKUs can mean increased cost of inventory. Demand for a particular SKU may not be enough to quickly clear inventory. Money spent to maintain a stock of goods in storage can range from an extra 15% to 40% of the product cost annually.

Brand Rationalization

The world’s second-biggest home products provider, Procter & Gamble (think Crest toothpaste and Gilette shaving products) consolidated or exited 61 brands over the past 18 months. While these brands represented 6% of profit in that timeframe, rationalization improved cash flow by lowering overall days inventory outstanding (DIO) from 78 to 58.

Number three home product provider, Unilever, ten years ago found that the variance of SKUs in their UK and Ireland operations accounted for 20% of their inventory, but contributed only 5% of their sales. The company has since made it a goal to reduce SKUs by 20%, a complex job for a company with 50,000 SKUs in many markets around the world.

While rationalization is most commonly used among manufacturers and retailers with tens-of-thousands of brands, products, and variations in their inventory, experts say it is becoming a trend across all sectors and all sizes of companies.

The bottom line is if you can determine what SKUs you can do without, based on analysis of sales data, you can increase your cash flow, and have more money resources on hand to focus on products that do better.