What is SKU proliferation?

SKU proliferation refers to the process by which a retailer or merchant adds products to their inventory.The justification for adding SKUs to a product may seem logical; if customers seem to be purchasing certain types of products, increasing the variations of those products could increase sales. But SKU proliferation when left unchecked, grows into a revenue sucking tumor in a business disrupting every part of the supply chain. skuproliferation_mouthwash

Further Reading What is an SKU?
 

For example, a retailer starts off by selling one brand of mouthwash in only one flavour. As time progresses, the retailer realises that customers also like a competing brand of mouthwash. The retailer then adds one flavour from the competing brand to the inventory. Down the road, the retailer adds more flavours in an attempt to increase the consumer pool. This process of increasing inventory in a bid to increase sales is known as SKU proliferation. 

But at which point do you stop adding products to your inventory? Many businesses find themselves trapped in a never ending cycle of adding more and more products, complicating their supply chains, increasing operational costs and impacting their bottom lines.  

SKU proliferation often causes more in costs and efficiencies than the items are worth. Simply adding products to an inventory causes problems such as;

  • Rising carrying costs due to slow-moving or dead stock
  • Price of manufacturing and production runs increase
  • Inability to accurate forecast sales for such a large number of SKUs

 

Therefore SKU proliferation is a process that needs to be done with careful consideration of the costs and a data-driven strategy. 

Key causes of SKU proliferation

  • Evolving customer expectations requiring you to hold more stock in order to fulfill orders within a quick turnaround period. Businesses end up having too much stock, even for slow moving items, on the off chance that they receive an order that needs to be delivered quickly. 
  • You add new SKUs primarily based on customer reviews and feedback rather than using sales reports to drive purchasing decisions.
  • Poor inventory lifecycle management. Not having an operational strategy or process to get rid of slow moving stock exacerbates SKU proliferation. 
  • Not knowing when to cut your losses; when stock cannot be cleared even after applying promotional tactics. 

Consequences of SKU proliferation

SKU proliferation when left unchecked can cause operational problems and hurt your business productivity. These problems include:

  • Increased chance of inaccurate order fulfillments. The larger the size of your inventory, the more complex your warehouse and distribution processes become. Without proper warehouse management, you run the risk of messing up orders because SKUs are too similar.
  • Increased storage costs. This is an obvious one; more SKUs mean more shelf space for storage. Large numbers of SKU’s can drive your warehouse storage costs significantly and may not be cost efficient for small businesses.
  • Inefficient allocation of capital. With SKU proliferation, significant amounts of capital are tied up in the large quantities of stock being held in your warehouses. Unless most of your products have a quick turnover rate, this is capital that goes into increasing manpower, marketing spend or into future growth strategies. 

Many of these reasons lead to the common misconception that SKU proliferation is something to be avoided. However SKU proliferation is inevitable with a growing business. The key is to regulate SKU proliferation so that new products and product lines add the most value with the least cost, and are based on accurate demand forecasting.
skuproliferation_skuthings

Further Reading What is SKU rationalization?
 

Proper management is key

SKU proliferation is part and parcel of a growing business, in fact it can be seen as an indicator of sustained demand and a customer base that is returning to your business. 

When bolstered by robust inventory and warehouse management processes, SKU proliferation can be a good thing for your business as it can lead to increased sales and higher revenue margins. Leverage data driven reports to understand which of your SKUs are performing well and which are not. Use that data to turn SKU proliferation to your advantage.

SKU proliferation affects operation efficiency as well as your bottom line, therefore taking a proactive approach to manage it could save you money and time in the long run.

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