SKU Optimization

An SKU number is a unique code that is assigned to each product in a company’s inventory. This is done so that companies can quickly scan items into computers that measure inventory electronically. The term SKU stands for “Stock Keeping Unit.” Each individual type of product will have its own SKU number.

“SKU stands for Stock Keeping Unit. It is the identification of a product or service using alphanumeric code. Each product will have its own SKU code so customers can tell the difference. For example, one product with 3 different labels should have 3 different SKU codes. Then, SKU code is used to track how many product variants the company has.”

Too Many SKUs

In a traditional business sense, it is always good to have many products for customers to choose from. However, having too much stock-keeping units (SKUs) can become complex international business operations. Because, too many products will lead to too many suppliers, too many data to collect and analyze, too many people to control, too many machines used to make products and too much storage space required.

SKU Rationalization

“SKU Rationalization, also known as SKU Optimization or Product Rationalization, is the decision-making process to determine if a particular product should be kept or discontinued. So the company can reduce inventory costs and cut down on complexities in procurement, production and distribution processes.”

Since there are so many factors come into play, then we would like to offer some guidelines for the project as

Step 1 – Select Product Categories

SKU rationalization project is not the job of inventory control people alone and a cross-functional team is required. Establishing a clear project management boundary like that in six sigma or lean manufacturing program is the key to success. At this stage, you pick which product family or category or brand you would like to review.

Step 2 – Identify Market Segment

Sometimes one product category may serve many customers. Then it may be necessary to know which market segment or sales channel we are focusing on. So project scope can be narrowed down further.

Step 3 – Make a List of Strategic Products

At this stage, we try to identify SKUs that we would like to keep. Then, you need to collect data on each SKU such as demand, profitability and common pack sizes.

Step 4 – Review All Other SKUs

In order to eliminate bad SKUs without sacrificing the value to customer service, a company should try to find one or more of product characteristics as below,

Demand

• High stock-out
• High shrinkage
• High product returns
• High pack size variety
• Erratic demand
• Demand declines in recent 1-2 years
• Low consume big shelf spaces

Production

• High setup time
• High labor processing
• High defects
• Low inventory turns

Supply

• Long lead-time
• Strict import control
• High currency risk

Do you need to know these demand/production/supply characteristics? Consider an item with an average sales volume with long lead-time and demand fluctuation. Do you really want to keep this item?

When you know all aspects of each item, it’s easier for a team to negotiate and make the objective decision whether to keep the items or eliminate some of them.

Step 5 – Eliminate Unnecessary SKUs

The final step is to trace SKUs you want to eliminate back to their raw materials, WIP, and all related finished goods.

As you can see, when you do this kind of project properly, you can reduce the numbers of suppliers you have to deal with, unnecessary machine setup time, unnecessary storage requirements. You can also free up your manpower so they can focus on some other things more productive.

Optimizing the SKU

It’s a systematic and consistent business process for analyzing, evaluating and deciding on how to manage your SKU portfolio in order to better align with your organization’s overall strategies, objectives and goals

This process is a blend of critical analysis tempered by the realities of the competitive marketplace

Typically, most companies develop and execute an annual process for the evaluation of their SKU portfolio

Benefits of an enterprise-wide SKU Optimization Process

• Identify profitable from unprofitable SKUs and rank order SKUs from highest profit to lowest
• Better understanding of total landed costs for specific SKUs and key drivers of operating cost components
• Enables more targeted actions to reduce costs
• Improved product availability (lower out of stocks)
• A defined, systematic process for evaluating SKUs that all of the key functions impacted by the SKU portfolio will understand
• Over time, organizations will also develop an improved understanding of revenue and profitability targets for new SKUs before they are launched
• A more educated and informed workforce
• Drivers of key costs and profitability
• Better understanding of how new SKUs support the Company’s overall short-term and long-term strategies
• Workforce will be able to make better everyday decisions in their respective functions

Major Components of this Process

• Understanding an organization’s strategies, objectives and goals (both short-term and longer term)
• Analyzing and developing operating profit by SKU
  • Operating profit represents gross margin less operating expenses, such as warehousing, distribution, etc.
    • Develop simple but powerful links between key costs and activities in each operating expense area
• Review of initial SKU profitability analysis and its potential implications
  • Consider other factors such as market share, competitive positioning, future category growth
• Finalize decisions around SKU deletions and implement according to organization’s annual planning calendar

SKU Assortment Optimization

It focuses on a consumer goods’ problem of SKU assortment, optimizing available SKUs, and tailoring assortments by store to maximize revenue.

We develop algorithms for SKU assortment optimization. This is an approach that uses advanced analytics on big data to create mitigation plans.

Questions often asked related to solving out-of-stocks:

• Which SKUs are performing best in a given market or store?
• Which SKUs should be allocated to a given market or store based on their performance?
• Which SKUs are low performing and should be replaced by higher performing SKUs?
• What other insights can we derive about our consumer and market segments?

Shelf ownership

The problem of keeping stocks shelved belongs to either the retailer, or to the consumer brand. Both care about keeping stocks shelved. Ultimately, shelf ownership determines who manages SKU assortment optimization.

Solution

The solution must be able to handle millions of SKUs and outlets (customers) by segmenting sales data into peer groups that enable detailed comparisons. The outcome of the solution is the ability to maximize sales at every outlet or store by tuning product assortments using advanced analytics and visualization tools to enable insights. Improved assortment optimization is estimated to result in a 5-10 percent sales increase. Insights result in:

• Understanding SKU portfolio performance and manage low performers
• Optimized distribution of SKUs to reduce out-of-stocks
• Understanding how new SKUs support short-term and long-term strategies
• Creating repeatable, scalable, and actionable insights with data already available