An important part of supply chain management and ensuring that your business is running as efficiently as possible consists of simplifying its business operations. One such technique is called SKU Rationalization. SKU stands for “Stock Keeping Unit” which serves to identify particular products or services using an alphanumeric code. Unlike a UPC/EAN code, SKUs are specific to retailers and help you manage your inventory.
Simply put, SKU rationalization refers to the process of determining whether certain products should be continued, in the effort of reducing the total number of items to reduce the complexity of the business operation.
Individual products have a SKU code that allows customers to easily tell the difference between them. While SKUs can be beneficial in terms of identifying products, having too many of them can lead to overall complex business operations. Too many SKUs correlates with an overabundance of suppliers, data, people, analysis, machines, and storage space.
This is where SKU rationalization comes into play. When determining whether certain products should be continued, the company is able to rid itself of unnecessary inventory costs and cut down other production costs as well. As with any process that may drastically change the way your business operates, there are steps outlines to effectively reduce SKUs with ease.
6 Steps to Reduce SKUs through SKU Rationalization
The 6 Steps in Reducing SKUs through SKU Rationalization include the following:
- Select Product Category: For a systematic approach to SKU rationalization, start with one category of products at a time. SKU rationalization does not only pertain to inventory control, it also requires a cross-functional team to determine which products should be continued and which should be discontinued. It is important to establish project boundaries and pick a product line or brand that is in need of review.
- Identify Market Segments: Identify who your marketing strategies will be focused on. This will help you condense your product families and determine which products would be of interest to that segment of people.
- Make a List of Products to Keep: The next step in SKU rationalization involves making a list of all products that you believe should be continued. Then, data should be collected for each SKU. This includes data for demand, customer preferences for specific product variations or pack sizes, and whether the item is profitable. Once you collect the data, you should be able to carefully decide which items are your best sellers and whether certain item variations can be discontinued.
- Review the Other SKUs: Now comes the time to identify the SKUs that should be discontinued. This can be tricky to do as you should remove items that aren’t profitable without sacrificing the value of your business to customers. SKUs that are not worth keeping are those with highly volatile demands, long lead times, and high production costs. To make it easier to identify which items should be discontinued, identify the characteristics pertaining to the demand, production, and supply for each item.
- Remove Unwanted SKUs: The final step of SKU rationalization is to remove the unwanted SKUs and stop purchasing the raw materials that are required to make them. You can identify product variations for those discontinued items to offer to customers that ask about them.
- Review and Repeat: Once you have adjusted your product catalog, let it sit for a period of time. Then, review your sales data and demands and determine whether more SKUs should be removed. This should give you more leeway to add new products that are high in demand by customers and let go of dead stock.
Benefits of SKU Rationalization
While reducing SKUs is an arduous process that requires the collaboration of multiple departments within a company, there are various benefits associated with it. These benefits include:
- Increased Forecasting Accuracy: After having analyzed the demand data for each item, you will have a better understanding of your sales history. This will allow you to identify demand patterns for that item and improve the accuracy of demand forecasts.
- Improved Efficiency: Having fewer products means you have fewer changeover hours on your precious resources that are incurred from switching from one product to another. This has the overall effect of improving your manufacturing efficiency and may lead you to produce more items that have a higher demand than was possible before.
- Reduced Inventory Carrying Cost: When you have reduced inventory, you require less space to hold those items. This is also true for raw materials that are required to make those finished goods. Inventory carrying costs refer to the costs incurred in the storage of inventory, such as the warehouse fees, additional insurance, labor fees, security, and other equipment required to hold those items.
- Better Product Innovation: With less money being spent on countless item variations and line expansions, there is more available to invest in product research and development. This means that companies will need to offer a much better product rather than a small variation of an existing product.
- Raw Material and Packaging Cost Reduction: Often, the SKUs that are discontinued are those that have high production or raw material costs. Reducing the number of offered items means that you need to buy less of those pricey materials. In addition, you can reduce the variations of packaging needed.
- Reduction in Logistics Cost: Total logistics costs include costs associated with warehousing, transportation, customer service, administration, and inventory holding. Carrying fewer SKUs may mean that you have to deal with fewer suppliers and distribute to fewer stores which would further reduce the costs.
- Increased Profit Margin: The main reason why organizations go through the process of SKU rationalization is to cut costs to increase their profit margin.
A software that can aid in eliminating SKUs is PlanetTogether’s Advanced Planning and Scheduling Software. PlanetTogether is a software that can provide a thorough insight into the operation and eliminate any unwanted cost and boost production efficiency.
The shift to PlanetTogether is saving us about 15% in inventory overhead and about 20% in overtime labor expenses. We're not building equipment to stock any longer - we're building to ship.
BRUCE HAYS, DIRECTOR OF MANUFACTURING, J&J SYNTHES
In addition, PlanetTogether offers analytics reports and dashboards which allow you to have a detailed look at your data and investigate certain KPIs that are important during SKU rationalization.
Advanced Planning and Scheduling (APS) Software
Advanced Planning and Scheduling Softwares have become a must for modern-day manufacturing operations as customer demand for increased product assortment, fast delivery, and downward cost pressures become prevalent. These systems help planners save time while providing greater agility in updating ever-changing priorities, production schedules, and inventory plans. APS Systems can be quickly integrated with an ERP/MRP software to fill the gaps where these systems lack planning and scheduling flexibility, accuracy, and efficiency.
With PlanetTogether you can:
- Create optimized schedules that balance production efficiency and delivery performance
- Maximize throughput on bottleneck resources to increase revenue
- Synchronize supply with demand to reduce inventories
- Provide company-wide visibility to resource capacity
- Enable scenario data-driven decision making
The implementation of an Advanced Planning and Scheduling (APS) Software will take your manufacturing operations to the next level of production efficiency by taking advantage of the operational data you already possess in your ERP system. APS is a step in the right direction of efficiency and lean manufacturing production enhancement. Try out a free trial or demo!