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Unpacking new products is one of the many joys of owning a store. But once they’re on shelves, how are they selling? By regularly conducting a SKU rationalization process, you will always know the answer to this question. Let’s dive into what SKU rationalization is, why it’s beneficial, and how to make it a regular part of your operations.
Retail 101: Terms to know
- SKU stands for Stock Keeping Unit. It is a customizable code that gives each item a unique nickname. Using SKUs helps you make sure tracking your store’s inventory is intuitive and efficient.
- SKU rationalization is the process of assessing every item on your shelves to ensure they add value to your business. Doing this is a key part of a retail strategy, helping you identify products that perform well—and phase out those that don’t.
The benefits of a SKU rationalization
Even if your overall sales are high, hidden inefficiencies can be slowly chipping away at your bottom line, like from expired products or wasted storage space. SKU rationalization catches these. And while the process might seem daunting, the positive impacts below prove that it is well worth your time and effort.
Increased profitability
It’s good to know what your star products are—especially ones that sell well and have higher margins. SKU rationalization helps identify these profitable items, so you can promote them more and seek out similar products to sell.
Decreased inventory costs
Holding inventory on shelves or in a back room comes with costs like storage, insurance, and capital investment. By eliminating underperforming SKUs, you reduce these costs. Less money tied up in slow-moving inventory means more working capital for your business.
Reduction in stock shrinkage
Stock shrinkage—due to damage, expiration, or even theft—can drag your profit down. By conducting a SKU rationalization and reducing the number of slow sellers, you decrease the risk of such losses. With fewer SKUs to manage, tracking inventory becomes simpler, reducing the chances of inventory errors.
Enhanced customer satisfaction
SKU rationalization pinpoints your most popular products … and the ones that just aren’t resonating with your customers. With this knowledge, you can redirect funds you had allocated for unpopular products and instead buy products your shoppers will love. Responding to demand like this in your shop is a key part of building an exceptional customer experience.
Streamlined operations
Fewer SKUs mean simpler operations, from ordering and inventory management to training staff on product knowledge. With a streamlined inventory, it’s easier and quicker to respond to changes in customer demand and market trends.
When to do a SKU rationalization
There is rarely a bad time to do a product rationalization, but there are several key moments when it is an especially good idea.
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In response to events: Conducting a SKU rationalization at the end of a season (or after a big sales event like Black Friday) can help you adjust your inventory to meet upcoming trends and demands.
- During business slowdowns: Does your store get really quiet for a few weeks after the holidays? A slowdown in business is a good opportunity to check in on operations, including inventory.
- When expanding or reducing store space: If you are making substantial changes in your physical store space, whether you’re expanding or downsizing, it can necessitate a look at stock levels and the types of products you carry.
Getting ready to assess your inventory
Preparation is key to effective SKU rationalization. Here’s how you can set the stage and ensure everything goes smoothly:
- Gather data: Using your inventory system, pull together your data on sales performance, customer returns, stock levels, and product costs. Ensure it is up-to-date and comprehensive.
- Set clear goals: Know what you want to achieve with your SKU rationalization process. Whether it’s reducing inventory costs, improving turnover, or aligning product offerings with market trends, having clear objectives will guide your decision-making process.
- Review supplier agreements: Understand the flexibility and terms of your agreements with suppliers. This knowledge is crucial when deciding to phase out or reduce orders of certain products.
How to conduct a SKU rationalization
Now that you are ready to start your product rationalization, simply follow the steps below:
1. See what is selling well
Check which products are bought often by looking at your sales records. If you have a point-of-sale system that tracks sales, see which items you are restocking often and which ones are just sitting there.
Tip: Make a simple list: Sells Fast, Sells Sometimes, Sells Rarely.
2. Check return rates
It’s great if items are selling, but not if those same items are being returned. Look at your records for how often items are returned by customers. High return rates often indicate issues with product satisfaction or quality.
Tip: Mark products as High Returns, Average Returns, Low Returns.
3. Determine costs
When assessing an item, it’s important that you know all of the costs associated with it. Keep track of what you pay to buy, store, and ship each product. Consider long-term storage costs, especially for items that don’t sell quickly.
Tip: Categorize products as Cheap to Keep, Reasonable Cost, or Expensive.
4. Calculate profitability
Looking at what an item is costing you to stock, you can determine if those expenses are worth it. For each product, subtract the total costs (purchase, storage, shipping) from the retail price. Then, consider how much space the product uses versus how much profit it generates.
Tip: Mark each product as High Profitability, Medium Profitability, or Low Profitability.
5. Assess customer demand
You want to keep an eye on if your products are still meeting your customers’ desires. Use surveys or sales trends to gauge ongoing interest in products. Watch for changes in buying patterns.
Tip: If once-popular items now show declining sales, try to determine the cause (new supplier, new location on your store shelves, seasonality of item, etc.).
6. Evaluate lead times
Track the time from ordering to delivery for each product. Long lead times can affect your ability to restock popular items quickly.
Tip: Categorize as Short Lead Time, Moderate Lead Time, Long Lead Time.
7. Choose what stays and what goes
Looking at all of the data you’ve collected above, it’s time to decide which products to continue selling and which to phase out. Use your lists to help make these decisions. Products that fall in the categories of Sells Rarely, High Returns, Expensive, and Long Lead Time might be good candidates to discontinue.
Tip: Phase out slowly by reducing order quantities before completely eliminating a product.
8. Make the changes
Now that you’ve made the hard choices, it’s time to adjust your inventory based on your decisions. You can offer discounts to clear out discontinued stock and avoid reordering these items.
Tip: Communicate changes clearly to customers, highlighting new and improved product alternatives.
9. Assess your decisions
Once you have completed your SKU rationalization process, be sure to monitor the impact of these changes on your business. Review your sales, profits, and customer feedback.
Tip: Be ready to tweak your strategy based on new data and customer feedback.
Remember, SKU rationalization is about making strategic decisions that can make your business nimbler and more efficient. You’ll get a clearer view of what drives your business forward, and it’ll take the guesswork out of your store’s success.
