SKU Rationalization: What Is It and How Can It Benefit Your Business?

SKU Rationalization: What Is It and How Can It Benefit Your Business?

Have you ever been confused about whether to keep a product or take it off the shelves? There might be multiple reasons behind it, such as too much inventory, too little warehouse space, dead stock, overstock from the holiday seasons, or more. This is one of the biggest dilemmas eCommerce business owners go through, whether small or established. It’s not as simple as going with your gut feeling about discontinuing a product, so how do you decide whether to keep or discontinue a product?

This is where SKU rationalization comes into the picture. In this technique, with the help of multiple analytical tools, and resources, you can identify which products are profitable for your business and which ones you need to be discontinued or reduced in number. Let’s get into a little more details of what SKU rationalization is, its benefits, and how you can use it to streamline your eCommerce business.

What is SKU Rationalization?

When you sell any product on your eCommerce platform, you typically have a SKU number or ID for that specific product. These are generated with the help of a SKU generator, and you cannot randomly add too many SKUs or products. If the SKUs go beyond a limit, it’s called SKU proliferation, which could cause serious consequences that could affect your business.

In SKU rationalization, you analyze your current physical inventory data, eliminate the products that are not performing well, and make other necessary inventory adjustments. One of the crucial factors affected by SKU rationalization is the days inventory outstanding (DIO), the number of days you hold a product in your inventory before it’s sold. The longer you hold them, the more your carrying cost will be.

Let’s take an example of a large electronic retailer store. Rationalizing the SKUs and streamlining the inventory for them means constantly updating the products they have based on which gaming products, mobile phones, laptops, and other electronic appliances are becoming outdated and going out of production.

Benefits of SKU Rationalization

There is a common misconception that SKU rationalization means just randomly reducing the number of products you have in your inventory. It’s not that simple. You analyze the performance of each product, the data you have on your inventory, the costs incurred and everything else to come to an informed decision on which product mixing strategy would help your business more.

Some of the other benefits of rationalization include:

Inventory Cost Control

One of the critical factors that add to the profitability of your eCommerce business is inventory holding costs. When you take out the low–demand or no-demand products from your inventory, it reduces the carrying costs and gives you more storage space to add new products or more profitable products.

Greater Profits with Fewer SKUs

Most often, eCommerce business owners feel the need to give their customers a broader range of product options. While that is great and could help you scale up your business, it also comes with additional costs and risks. Customers love it when they have limited products to choose from, especially hero products. This could also help you create a niche and dominate the market, eliminating competition.

Better Brand Identity

Haven’t we all looked at that one neighbor or friend of ours who’s constantly updated with the new fashion or technology trends with a bit of jealousy? eCommerce business isn’t much different either. Customers would always choose the business that is fast in offering them new products launched in the market. Being updated with the current market trends and pulling down the products that are not doing well anymore helps build a connection with your customers as a brand constantly watching the customer preferences and patterns.

Easier Warehouse Management

The more products you have, the more difficult it gets to manage and track them. Especially when you are a small eCommerce business planning on expansion, you shouldn’t be wasting much time and energy on a messy, disorganized warehouse. Fewer SKUs mean significant cost reduction on inventory management, shipping, labeling, and more.

How to Rationalize Your SKUs

Below are some steps you can take to implement SKU rationalization into your warehousing and inventory management strategies.

Update Inventory Count

Be updated with your inventory count. Physically keeping a count of your inventory can be daunting. That is why you need an automated, efficient inventory management system to help you manage the inventory and provide you with a detailed SKU analysis.

Forecast Demand with SKUs

Align your business goals and forecasting to your SKUs. While stocking new products can be exciting, you should also have an efficient promotional and marketing strategy in place. Your SKU rationalization should be directly aligned with your demand forecasting so that it serves your customer better.

Identify Competitive SKUs

A competitive edge is not just about having the same products as your competitors. It’s also about how effectively you are selling them and how better your customer experience is. SKU rationalization can help you identify the gaps in your product catalogs and focus on the products that could offer you a competitive edge and profits.

Understand that SKU Rationalization is Beneficial

Understand that SKU rationalization is not a task that you are forced to do but an important business strategy. It helps you stay relevant, reduce your inventory costs, increase profitability, and sell great and better products.

Key Takeaway

Warehouse management, especially managing SKUs and optimizing them, can be time-consuming and requires analytical skills. When you focus on building and sustaining your eCommerce business, you might not have enough time to manage SKUs and rationalize them. If you are growing a business, it could also take a toll on your costs.

Partnering with a 3PL fulfillment provider like ShipBots could solve all your warehouse and inventory management problems at the same time and help you reduce your costs significantly. We can help you generate, manage and organize your SKUs efficiently and effectively. Get in touch with us today to know more about how we can help you rationalize your SKUs and better manage your inventory.

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