Free up capital and reduce carrying costs with SKU rationalization

Learn about stock keeping unit rationalization, what it is, and how SKUs can help keep your inventory optimized.

Using SKU rationalization to manage inventory.
Last updated: 02.12.2022

As your business grows, you’ll start to notice that it’s hard to keep stock organized.

Maybe you’ve recently noticed that there are some solitary dusty items on shelves that haven’t piqued the interest of any buyers for months.

You’ll be glad to know that you don’t have to tolerate these squatters any longer with SKU rationalization.

SKUs are unique alphanumeric codes used to identify items in your inventory. While barcodes are the same for all like products and can be used externally, SKUs are unique to a business. You can use SKUs to track sales, manage stock levels, and more.

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What is SKU rationalization

SKU rationalization is the process of reducing SKU counts in order to simplify inventory management and reduce storage costs. It is a crucial component of lean manufacturing and can be applied to any type of product, from food to electronics.

For example, when a new and improved product variant is released, or if you’re in the apparel business and products go out of style, certain items drop in popularity. However, these are not the only reasons why businesses discontinue items.

Retailers, wholesalers, and manufacturers alike need to constantly analyze their product lines and make adjustments to ensure that they keep the right products in stock while reducing overall inventory costs. One way to do this is through a process called SKU rationalization.

SKU rationalization helps you understand which products are profitable and which ones should be discontinued based on shifts in demand.

The importance of maintaining a fully optimized inventory

All items held in stock incur carrying costs. These are costs involved in storing, transporting, and handling items. Besides that, these items also tie up capital.

This is all well and good if the products bring in enough money to offset these costs and turn a profit. But if they don’t, it’s essential to take a closer look at your inventory and see where you can make some changes.

Businesses often want to cater to every need, but too big of a product catalog also has its downsides.

Research has shown that offering too many options can cause choice overload and decision fatigue. Meaning that, when presented with an overabundance of choices, the customer will often revert to the default item or may even avoid the purchase altogether.

What’s more, by eliminating items that don’t sell well, you can free up both space and capital, which can then be reinvested into other areas of your business.

5 benefits of product rationalization

Before we look at ways you can streamline inventory, let’s see the key benefits of SKU rationalization.

1. Reduced inventory management costs

The goal of SKU rationalization is to reduce inventory and, more particularly, the number of SKUs while still meeting customer demand. By doing that, businesses can lower their carrying costs and minimize the amount of dead stock.

When you rationalize your SKUs, you can also reduce labor costs as you’ll need fewer employees to manage less inventory.

Lowering the number of products can also simplify inventory management and reduce errors. When you store many items with just slight variations, it’s much more likely that wrong items are shipped. This, in turn, can lead to angry customers.

2. Increased sales and profits

By reducing the number of SKUs, you can focus on selling items that are most popular with customers. This can lead to increased inventory turnover as you’re able to sell more top-selling products.

In addition, getting rid of slow-moving items can increase profitability since you no longer have to offer discounts to get them off the shelves.

3. Improved customer satisfaction

When you eliminate an existing product that doesn’t sell well, you’ll make it easier for customers to choose the product they want. Bombarding customers with tons of color options can often have the opposite effect. There’s a reason why Apple only offers limited customization options.

4. Improved efficiency

An optimized inventory is a lot easier to manage and organize. Eliminating SKUs that don’t sell clears up your warehouse of obscure items that are just gathering dust.

Additionally, having fewer items can significantly simplify your manufacturing processes as you won’t have to produce as many different types of products.

5. Stronger brand identity

With a smaller product portfolio, you will be able to focus on fewer SKUs which can help to solidify your brand’s identity. When customers can more easily associate your brand with a limited number of products, they are more likely to remember your brand and convert to loyal customers.

With all the data you need to collect when rationalizing your SKUs, you have everything you need to generate better ads for your target market.

A woman updating her stock keeping numbers on her handheld device.

4 product rationalization challenges

While the long-term benefits are clear, every change comes with its own challenges that need to be considered.

1. Complexity and time-consumption

SKU rationalization can be a complex and time-consuming process. It’s essential to clearly understand your inventory and business goals before you start. In addition, you will need to have access to accurate sales data in order to make informed decisions.

2. Changes in supply chain

Another challenge is that stock keeping unit rationalization can sometimes lead to disruptions in the supply chain. For example, if you discontinue an SKU that is used in the production of another product, you may need to make changes to your manufacturing processes.

3. Impact on employees

It’s also important to consider the impact on employees. With changes in products and processes, some may need to be retrained on the new SKU lineup or be reassigned to different tasks.

4. Changes to packaging and visuals

In some cases, SKU rationalization may also require changes to your packaging or marketing materials. This is why it’s important to have a clear plan in place before you start making any changes.

Now that we’ve covered the benefits and challenges, let’s see what steps you need to take to optimize your inventory.

The SKU rationalization process in 4 steps

SKU rationalization process consists of four parts:

  1. Data collection
  2. SKU analysis
  3. Decision making
  4. Implementation

Let’s take a look at each of the steps in more detail and see what’s involved in implementing them.

1. Data collection

To start, you need to collect accurate data on all the SKUs in your inventory. This data should include insights into sales, stock levels, margins, and more. You will also need to track customer demand and understand which products are most popular.

Including historical sales data about marketing and advertising campaigns for each SKU is also important. You may discover that certain products sold well thanks to the campaign but didn’t perform as well after the campaign ended.

2. Analysis

Once you have all the data, it’s time to analyze it. Look for patterns and trends in the data and identify which SKUs are selling well, and which are not.

Analyzing your data will help you understand which products are selling, how well they are selling, what needs to be improved, and so on. Doing this analysis will also help you determine which SKUs are worth keeping and which ones need to be eliminated.

3. Decision making

Based on your analysis, you will need to make some tough decisions about which SKUs to keep and which ones to discontinue. Remember, the goal is to reduce inventory costs while still being able to meet customer demand.

There are a few different ways to go about this. One way is to eliminate the bottom 10% or 20% of your SKUs in terms of sales volume. Another option would be to remove products that have the highest returns or the lowest margins.

You will also need to consider the practicality of each SKU. For example, a product with very low margins may not be worth keeping in stock. On the other hand, a product with high margins but low demand may also not be worth keeping.

It is important to consider all these factors before making any final decisions. If done correctly, you’ll have a well-rounded and balanced inventory that can still generate a profit.

Once you have identified the SKUs to eliminate, it’s time to make the decision to actually get rid of them. This can be difficult, especially if you are attached to the product or if it has been in your inventory for a long time. But if the item is not selling, it’s just generating unnecessary costs.

4. Implementation

The last step is to implement the changes. This may involve updating the SKUs in your inventory management software, training employees on the new stock keeping unit lineup, or stopping the production of certain products altogether.

It’s worth keeping in mind that while certain products may not sell very well, these may still indirectly affect your bottom line.

For example, customers may come to your store because it offers the widest selection of products. Even if they don’t buy everything, the presence of different options may help to attract them. If you reduce your selection, these customers may take their business elsewhere.

That’s why it’s essential to analyze the data collected carefully. In addition, you may want to implement the changes step by step so that you can monitor the effects before making anything too permanent.

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Tools to help you with SKU inventory control

Optimizing your inventory may seem like a daunting task, but luckily there are tools to do the heavy lifting.

You can benefit from this SKU generator if you don’t yet have SKUs assigned to your items. Besides generating SKU codes, you can use this spreadsheet template to track your product inventory, including subassemblies and raw materials.

Another tool that every growing manufacturer should consider for inventory

control is a manufacturing ERP.

With Katana’s manufacturing ERP software, you can keep track of your SKUs in one place. You can also seamlessly connect with the most popular reporting tools to get all the vital data you need regarding your inventory and SKU performance.

Besides SKU rationalization, Katana can automate other inventory management and production processes. In other words, it takes the guesswork out of keeping your shelves stocked — so you can focus on more important things, like growing your business.

Henry Kivimaa Photo

Henry Kivimaa


Henry is an avid traveler with a passion for writing. Having lived most of his adult life abroad, he’s amassed a variety of experiences from many different fields. From ForEx trading to compliance to mobile engineering to demolition, he’s definitely not afraid to test out new things.

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