SKU Rationalization Process: Benefits & Analysis

The SKU rationalization process plays a big role in tracking inventory movement automatically, and many companies rely on it to quickly decide which products to restock. This process mainly helps to increase profits and reduce costs incurred by the company, by periodically evaluating the product line and improving the company’s inventory according to profit rates. In this article, we will provide you with all the details about the SKU rationalization process and its importance, as well as how you can benefit from it in your business.

What is a stock keeping unit (SKU)?

Before we start talking about the SKU rationalization process, we will first need to know what a stock keeping unit (SKU) is.

It is an inventory management system that generates a unique scannable barcode, which is placed on product labels in retail stores.

Which helps companies track inventory of those products as well as sales percentages.

And this is to determine the profits they make for incorporating this product into the items they sell, and determine whether they continue to provide it or not.

The stock keeping unit (SKU) consists of a set of letters and numbers, through which qualities and information about the product itself are identified. where it specifies:

• Manufacture company.
• Trade mark.
• Color.
• Size.
• Class.

And other important information and specifications about the product itself. This code usually consists of 6-18 letters or numbers.

What is SKU rationalization?

 

As for the SKU rationalization process, it is the process by which items are evaluated that the company needs to add or remove from its inventory.

The final decision on that process depends on the profitability of the product itself as well as the percentage of demand for it.

And despite that there are a number of reasons why some companies keep stocks of less profitable items.

For the SKU rationalization process to be successful, the right data must be provided, along with the right time to make the right decisions.

Also, the person involved in making decisions resulting from the SKU rationalization process should have a deep understanding of the strengths and weaknesses of the company itself.

Benefits of SKU rationalization

The benefits of the SKU rationalization process are numerous, especially since it is an inventory management technique that effectively contributes to improving profitability.

So companies that use the SKU rationalization process are always sure that they are going in the right direction and making the right decisions.

It helps focus on inventory needs, thus contributing to business prosperity and profitability.

Below are a number of points that highlight the main benefits of the SKU rationalization process:

1. Reduction of inventory holding costs

One of the most important benefits of the SKU rationalization process is that it reduces your inventory maintenance costs, because it reduces unnecessary inventory.

This avoids the expenses associated with holding inventory for a long time, as well as the costs of inventory obsolescence or loss.

2. Reduce human errors

Inventory and related data such as pricing and inventory counting are appropriately managed through this process.

Which helps prevent all human errors related to wrong choice or misshipping.

3. Improve warehouse management process flow

SKU rationalization process helps in further streamlining warehouse operations, thus improving inventory and goods flow process.

This contributes to maintaining goods in an orderly manner in warehouses, and this improves operations in warehouses in general.

4. Determine the priority of some products

A stock keeping unit system helps to determine the sales volume of different products, as there are certain types of colors or sizes that are more popular than others.​

5. Increase corporate profitability

One of the most important benefits of this process is its great role in maximizing corporate profits.

Because it helps them make appropriate decisions about the products they deal with.

The SKU rationalization process guides companies to learn consumer trends, thereby stocking products that buyers want more of.

6. Understanding products and their movements

The stock keeping unit enables an efficient understanding of products and their movements.

As it makes all concerned parties aware of the amount of stock and product information.

7. Strengthening the organization of warehouses

Through this process, companies will retain products that are in constant demand.

Thus reducing the amount of inventory you have and the costs associated with it.

As well as making your warehouses more organized, and thus easier to manage and handle their operations.

4 steps to implement an SKU rationalization process

 

There are a set of basic steps that you will need to follow in order to be able to implement the SKU rationalization process in your business. Here are the most important of those steps:

1. Determine your target market

The first step in implementing the SKU rationalization process is to identify your target market before you begin analyzing any data.

And that can be done by answering several questions, such as:

• Who is the target group of the audience?
• What are the needs of the target audience?
• What types of audience are you interested in?

Then try to put together a strong list to review the products you offer them, so that you can choose the products that suit your target audience.

2. Perform a detailed SKU analysis

The second step you need is to conduct a detailed SKU analysis, by monitoring your sales data over a specific period.

After considering the costs of your inventory itself, you will have a good idea of which SKUs will bring you the highest real returns.

3. Check for other variables that could affect your results

After completing the SKU analysis as indicated, in this step you will need to consider other factors that can affect the profitability results of your SKU.

Examining the activities of your competitors can also help you know which products will generate more sales for you and attract customers to you.

4. Organize your product catalogs

In the final step of applying the SKU rationalization process to your business, you will need to collect and organize your SKUs well

This is done by placing them in different categories while sorting, which makes it easier for you to review them on the go and thus avoid mistakes.

And be sure to review the results well after you have finished organizing your product catalogs, to see their impact on your costs and profits as well.