Tag Archives: SKU Rationalization

The supply chain is a business’s lifeblood. Unfortunately, much like our own bodies, it’s possible for this system to become sluggish and lethargic through neglect. Just as a lack of exercise and a poor diet can cause our blood to become clogged with cholesterol and fat, inefficient warehouse management can lead to serious issues for your operation. This is why it’s so important to understand how to avoid bad habits that can lead to problems in your warehouse operation.

For example, one of the most common mistakes made in these environments is having too much inventory. A glut of products means the money spent producing them is just sitting on the shelf providing no return on investment. A strict SKU rationalization plan can ensure that nothing goes to waste, and that only those items that are sure to sell enter the supply chain.

Another frequent misstep is made when inventory management doesn’t include metrics. Without a clear idea of how well a facility is performing, it can become nearly impossible to make improvements. Measuring all the factors that matter to your operations is essential if you want to streamline them. Too many warehouse managers also forget about work in process as they rush to push end-of-month orders out the door. When there are no finished goods to fill orders at the start of the month, they’re always playing catch-up.

Taking care of your body is crucial if you want to live a longer, healthier life — and the same principle applies to your warehouse management. For more tips on how to avoid poor habits that can hurt your business, see the accompanying infographic.

Author bio: Don Amato is Vice President of Sales for Chicago Tag & Label, which manufactures form labels, labels and tags that deliver solutions to a broad range of industries including retail, industrial, manufacturing, distribution and medical environments.

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Modern retail organizations stock many different items to attract the widest audience of customers. But did you know that, according to the National Association of Convenience Stores and Inbound Logistics, the average corner convenience store may have as many as 2,500 SKUs, while the big-box grocer down the street might store more than 40,000?

Keeping this many products on hand might seem like the ideal strategy for facing ever-changing consumer demands. But this stock-heavy approach often does more damage than good. Simply storing in-demand products is expensive, and keeping items that fail to move costs even more. For this reason, many sellers are embracing SKU rationalization, which involves evaluating available products and stocking only the most sought-after items.

Intent on reducing its annual gross margin by 125 basis points, Hershey recently embraced this methodology, Food Business News reported. Retailers that believe they’re spending too much on warehousing undesirable items would be wise to follow in the footsteps of the confectionery giant. Here are three strategies for jump-starting SKU rationalization:

1. Establish workable sales benchmarks
Businesses pursuing SKU rationalization must establish sales benchmarks to determine which SKUs to cut. These thresholds will vary depending on the financial state of the organization and its fiscal goals. Scale is another critical differentiating factor. Larger retailers might use established benchmarks involving cases sold. Smaller sellers might use just units, according to Retail Wire.

2. Embrace the ABC inventory rule
With workable benchmarks in place, organizations can move on to cutting down stock. The ABC inventory reduction strategy is perhaps the best option for retailers embarking on such efforts, Inbound Logistics reported. This involves separating items into three categories: Products in the A category are bestsellers. Those in the B category generally perform well. Items in the C-category rarely sell and drive up costs simply by sitting in the warehouse. These are offerings removed as part of SKU rationalization.

3. Address disposal
After identifying products ripe for removal, organizations must figure out methods for disposal. This is often easier said than done, but many businesses find success through write-offs or low-priced distribution networks perfect for off-loading superfluous product.

Retailers that implement these three strategies can effectively manage SKU rationalization efforts and generate savings. Those still unsure of how to pursue this methodology should consider working with USC Consulting Group. For more than five decades, our experts have been helping sellers streamline their operations through cutting-edge optimization efforts.

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Behind every great retailer, there is a warehouse receiving, stocking, sorting, and distributing its products. These operations serve an invaluable service to these enterprises, but if one had to put a number on it, Supply Chain Digest estimated the total cost of logistics in the U.S. just under $1.5 trillion in 2014. Businesses spend significantly on their warehouses and logistics teams, trying to hone processes and accrue efficiency wherever possible, like building a better scheduling system so pickers can coordinate better with transportation or designing a more organized floor plan that limits excessive travel.

However, one lean processing enhancement retailers often balk at the opportunity to adopt is stockkeeping unit (SKU) rationalization, the act of reducing the number of different products they sell to streamline business all along the supply chain. According to research from the Association for Convenience and Fuel Retailing – formerly the National Association of Convenience Stores – the average retailer stocks between 2,500 and 3,000 SKUs. Paul A. Myerson, professor of Supply Chain Management at Lehigh University and contributor for Inbound Logistics, wrote grocery stores can easily hold up to 40,000 SKUs. Even removing a handful of these SKUs put less of a logistical strain on warehouses and creates space for newer, more profitable products.

How can retailers get the most out of SKU rationalization initiatives?

As far-reaching as these benefits of removing a few underachieving products could stretch, some retailers may still find it difficult to decide which items should be removed from shelves for the sake of optimization. What sorts of tools could retailers adopt to create the most cost-effective cuts?

Distinguish between successes and failures using one time-tested method: the Pareto Principle.

Apply the Pareto Principle
Merchandise can only be profitable to retailers if it indeed turns a profit, if customers buy it, and a demand is evident. Otherwise, retailers waste money, time, and valuable shelf space stocking products no one wants. Worse still, they’ll need to pay for removal of these failing products as well.  If retailers could collaborate with their warehouse logistics teams, be they in-house or third-party, to create a reliable metric by which to separate products on the grounds of success, these enterprises could intelligently discern which products actually move through the supply chain and which ones simply crowd the aisles of their stores.

In doing so, retailers should keep the Pareto Principle – also known as the “80/20 Rule” – in the back of their minds. As this economics cornerstone dictates, 80 percent of effects come from only 20 percent of causes. In this case, 80 percent of sales only come from 20 percent of the items on warehouse shelves. Identifying and quarantining the highest fifth of SKUs within a given inventory can help inform retailers as they make their decisions as to what needs cutting. For example, if a brand with five overall SKUs has four in the top percentile, perhaps retailers would benefit from holding onto all five. Alternatively, if another brand only has one of its five SKUs in the most profitable echelon, perhaps this would make a good area for SKU rationalization.

“Tracking end-user purchasing activity can simplify SKU rationalization.”

Count on customer-focused cutbacks
All this aside, the most trying reason why retailers find SKU rationalization so difficult is the inherent element of customer retention. Should a retailer discontinue a product popular to a small, but loyal customer base, they risk losing its business permanently. So, when developing a plan for implementing SKU rationalization, forgetting to consider what the customer thinks would be foolish, for a number of reasons. Most importantly, tracking end-user purchasing activity can simplify the process even more.

For instance, a Marketelligent study found the success rate of SKUs segmented by color and style stayed relatively constant year after year, and any designs reactivated after being discontinued because of underperformance experienced no great gains or losses either way. In fact, on a list of SKU popularity rank from highest to lowest, the farther one descends, the steeper the climb to “long tail” logistics. This means mid to low-selling items suffer more from a greater number of options. By studying customer buying habits and their cumulative effect on sales, retailers and their warehouse teams can plot a course for effective SKU rationalization that reduces costs, complexity, and waste.

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