20 May 2023 It is common in various market sectors to find the following thought: “the greater the variety of products available in my warehouse and on the shelves, the greater the number of customers and the profitability of my company.” But does this statement make sense for all business models? Could it be that your company, when considering the diversity of products in stock to serve different audiences, has inactive goods that cause losses to your logistics? Expanding the customer base is a priority for the success of any company; however, choosing to achieve this goal by investing in different products can suddenly increase the number of SKUs in your stock. In other words, it can considerably increase the number of items in your inventory, damaging the organization, increasing the risk of losses, damage, and space and maintenance costs, as well as reducing profitability, generating insufficient results over time. With this challenge in mind, this article will address SKU Rationalization, a methodology used to optimize your inventory based on the analysis and elimination of obsolete and redundant products from your inventory, which can harm your performance and growth in the market. Next, learn how to optimize, simplify, and reduce inventory costs. What is SKU Rationalization and how important is it for my warehouse? We have previously seen that when choosing to increase the variety of products in stock to meet the diverse demands of the market, a warehouse is subject to a phenomenon known as SKU proliferation, which is an excessive increase in the number of items in stock. Throughout history, we can easily observe this effect: a survey conducted by the Food Industry Association, for example, analyzed that the retail trade of food products in the USA saw a 370% increase in the variety of items available in stock from 1975 to the year 2018. On the other hand, in an opposite movement, we have SKU Rationalization, which is nothing more than a detailed analysis of the products currently available in stock and the elimination of SKUs that are not selling and no longer make sense in the inventory. Market giants like Walmart have reduced their stocks after realizing that a smart and well-planned inventory promotes greater profits for the company. In 2015, for example, the company reduced the number of item variants on the shelves by 15%. Therefore, it is essential that every company offering a plurality of products that could become obsolete, such as technological and clothing products, prioritize SKU Rationalization, as excess products in their stock can increase logistics costs without bringing the expected return. 5 Advantages of SKU Rationalization After better understanding SKU Rationalization and the importance of its application in your business model, we have identified 5 main advantages that you, as a manager, will identify when analyzing your stock and simplifying it by reducing obsolete SKUs: Increased Profitability: Yes, believe me: reducing stock increases your profitability. To do this, we must remember that stocks are the largest resource in a warehouse, so any investment made in unsold products, expenses dedicated to maintenance, or even inactive stocks are money going away. If there are not enough sales of certain products and there are investments to keep them in stock, the calculation is simple: you are losing money. Simplified Cost and Stock Control: Working with a wide variety of SKUs requires a larger team for organization, attention, maintenance, and also spaces compatible with the volume. All this generates expenses for the warehouse. By reducing the number of SKUs, it is possible to identify less product waste, less time dedicated to inventory management, and intelligent use of storage space. Process Optimization: Another advantage that can be observed by reducing the number of SKUs in the warehouse is the optimization of general processes within the workflow of the logistics chain. With fewer products offered, the processes of order picking and shipping are simplified. In this way, you, the manager, can identify effective and economical ways of organization, preparation, and shipping, seeking new strategies that increasingly optimize internal processes. Reduction in Freight Costs: Today, freight costs can represent up to 30% of your company’s expenses, as there are storage, insurance, and labor costs, in addition to storing and caring for all products after purchasing the items. By continuously analyzing sales history and choosing the exact quantity of each SKU for your stock, you will be able to better guide suppliers, choose the periods in which you want to make a new purchase, find cheaper ways to replenish your stocks, and, above all, have greater control over inventory rotation. Greater Brand Awareness: It is possible that, having old items in stock, the quality of the products may be lost, which could eventually result in a bad consumer experience. Therefore, by prioritizing the reduced number of SKUs and keeping stocks always up to date, your company’s reputation will gain prominence in the market, as it will start offering the final customer modern products that are always in line with market trends. Start optimizing your inventory through SKU Rationalization. Now that you understand everything about SKU Rationalization, it’s time to optimize your inventory and simplify your warehouse. If you have questions about where to start thinking about the analysis and elimination of SKUs, we can help you: Identify Your Target Audience: Before eliminating SKUs from your stock, check which market you serve the most today and identify your target audience, that is, the one that buys the most and represents the largest share of your company’s sales. Then, identify the needs of this audience, what it consumes the most, seasonality, and purchase frequency, among other preferences. Once the peculiarities of this audience are identified, you can also identify which products sell the most and the reasons why SKUs are stuck in stock, and you can remove some items. Conduct Detailed Evaluations: If you have a good inventory management system, you have likely identified the products most preferred by consumers. If not, it is important to evaluate in detail and be aware of demand volatility, low stock rotation, delivery times, progress in the picking and maintenance area. If problems are identified in any of these points, it is a warning sign regarding the possibility of removing a particular product from the warehouse. Organize Your New SKU Catalog by Categories: After identifying your audience’s preferences and analyzing the products still in stock, you, as a manager, can separate the products by categories such as “keep,” “remove,” and “review,” where the products under review are those that will undergo new sales tests, whether it is a campaign or even a new seasonal period. This way, it is easier to organize the remaining and permanently out-of-stock SKUs. Measure the Results: After implementing the new catalog and new products, it is essential to measure the results. Understand if overall costs have decreased, if operational performance and stock management are more organized and simplified, and, of course, if profitability has increased. Measuring results is a great way to find new solutions for your company’s success. In this article, we covered everything you, as a manager, needed to know about SKU Rationalization and how this strategy helps simplify and optimize inventory management. One of the ways to enhance your company’s results is to invest in management systems capable of integrating all sectors of your warehouse in one place, offering real-time information and sales behavior history, essential data for decision-making when optimizing your inventory. At DEAGOR, you will find the management system WMS, a tool capable of helping you make the best decisions for your business. With it, you can monitor the progress of SKUs in your stock over time, receiving complete and dynamic reports, including stock turnover, sales, and demand forecasts. To learn more about how WMS can help you rationalize your SKU, contact our experts and schedule a conversation. Creating SKUs: What They Are and Why You Should Implement Them in Your Company Deagor WMS per ecommerce può aiutarti!