INVENTORY MANAGEMENT   |   7 minute read

SKU rationalization: What is it and is it important to my small business?

SKU Rationalization is a process by which merchants determine if a particular product is kept on the shelf or if it should be discontinued, based on its profitability. This process is also known as inventory optimization or product optimization.

Learn more: What is an SKU number?

More and more merchants are turning to SKU rationalization to help them better understand and optimise their inventory. The process involves using analytical tools and reports to determine if items in an inventory catalogue should be retained or deleted or if new items should be added. 

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In short SKU rationalization helps merchants understand how existing products are performing and how much revenue each of those products contribute to the business. This then enables the merchant to reduce inventory cost without impacting revenue and also to understand how similar new products may perform if added to the inventory.  

SKU rationalization leads to smarter business decisions and improves several areas of a business's operations including; 

Neglecting SKU rationalization could lead to overly costly, complicated and inefficient back-end operations. Holding too much inventory without visibility into performance could lead to; 

  • Underutilized data and suboptimal business decisions
  • Unnecessarily large teams to handle inventory
  • Complicated supplier management with too many suppliers
  • Deadstock taking up warehouse space and costing the business indefinitely

In addition to the benefits of SKU rationalization on supply chain management, the process also leads to better product lifecycle management. By implementing SKU rationalization as part of product lifecycle management processes, merchants can deliver positive financial results to the company while defining the boundaries of the process clearly. SKU rationalization allows the businesses to review product lifecycles on a granular level, broken down by type, brand, category or family.

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SKU rationalization also leads to more impactful marketing strategies. As a result of the data reviewed during the rationalization process, merchants understand consumer buying behaviour better. Products and brands that consistently fly off the shelf indicate a large and loyal customer base. Therefore marketing strategies such as digital banners on social media platforms advertising these products are more likely to drive sales than products serving a relatively unknown brand or one that doesn’t deliver customer satisfaction. 

tradegecko-sku-rationalization-marketingSKU rationalization provides a strong foundation for marketing campaigns because they rely on historical data and factor in sales forecasts. Therefore campaigns are able to implement strategies that worked in the past while working in new elements to manage fluctuations in demand, in the future.

SKU rationalization can positively impact the overall performance of a business, from purchasing, to storage, sales and marketing. Therefore it should be factored into the growth strategies of all the aspects of the business, and the team performing the rationalization should be cross functional, rather than relying on the inventory manager or operations team. By implementing SKU rationalization within your business you can increase cash flow and free up resources that can be used to implement growth strategies and new product lines that are more likely to perform well.

Ready to create your first SKUs? Check out our relating articles on Setting up SKU correctly and download our Free SKU generator now!

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