SKU
Rationalization is the process of re-looking at your product portfolio and depending
on the business you are in, optimizing it on the basis of one or more parameters. The objective
of a SKU rationalization exercise is to decrease business complexities that
arise from managing too many items, various vendor relationships, inventory, business processes, product lifecycles, customer preferences, etc while ensuring there isn’t any substantial
impact to the top or bottom line, and customer satisfaction.
Traditional SKU Rationalization: A SKU rationalization exercise usually
starts with identifying parameters that need to form the basis of
rationalization:
- Identify and retain the high volume
SKUs: whether low volumes SKUs need to be rationalized - not a good idea if
product life cycles are short and they follow the bell curve, you may end up
rationalizing something that is yet to perform
- Identify and retain the high margin
SKUs: whether low margin SKUs need to be rationalized - ideal for businesses
with specific vendor issues, not so ideal for enterprises functioning mainly in
low margin high volume SKUs, and high margin low volume SKUs
- Identify and retain SKUs that have a
higher shelf life - an important criteria in the perishable food business and businesses
such as apparel, fashion accessories that follow market trends
- Identify and retain SKUs that are in tune with
current and future customer preferences - product categories that are likely to
grow / retain their market share based on historical data, style and color
preferences.
Most
businesses would have atleast two key criteria that they would like to base their
rationalization on; a good approach is to plot a 2 X 2 matrix with these
criteria and then decide on the thresholds.
The above
illustration plots margin vs. volumes to arrive at an appropriate threshold.
An alternative approach to SKU Rationalization: Although traditional rationalization
exercises are carried out at a SKU level, creating segments of similar product
types helps the overall objective of decreasing business complexities. Segments may be made at a style level, color level, or any other relevant dimension to
evaluate a category performance. Eg;
evaluation of style performance, followed by performance of colors within
a style, etc. In this scenario, entire style families may be rationalized, followed by non-performing colors in some style families, and few entire style families may be
retained.
The
sequence of arriving at parameters for rationalization and creating segments may be interchanged; also the former may be tweaked depending on the
latter’s results. Also parameters and threshold may vary in each segment.
Developing an evaluation framework model: businesses may like to incorporate
various rationalization criteria, modify each, and measure impact; simulators
may be built for the same. Such models may have multiple evaluation criteria
with varying thresholds.
A SKU
rationalization exercise should be supplemented with an impact study: ’what is
the revenue impact associated with the exercise’ and how can it be minimized;
‘what is the inventory carrying impact’ and overall savings, 'will it result in Customer dissatisfaction', etc. Analysis on
customer buying patterns of various product categories such as ‘what is the customer reactivation rate on rationalized SKU's’, ‘how many customers return on the same
SKU’, ‘is the product seasonal’, ‘what is the ideal time frame to rationalize
the category’, ‘what are the substitute products that the customer can be
offered’ are also essential.
Please also find a case-study on some of our recent work on SKU Rationalization here.
