Do you know why sales ranking your products is so important? Do you know how it can improve your bottom line? Here’s the crux of SKU (Stock Keeping Unit) rationalisation and how to go about sales ranking your products.
What is your inventory made up of? If you’re a retailer, wholesaler or distributor, in an ideal world you would be able to meet all your customers’ needs with inventory comprised of items that sell quickly, deliver high profit margins, don’t take up too much space in the warehouse and can be shipped easily and safely.
But of course, nobody lives in an ideal world. Far from it. If yours is a typical supply chain business your inventory may be made up of products that fit the above description along with items that languish on warehouse shelves, deliver low margins, take up excessive space and sometimes run into problems when it comes to purchasing and shipping.
You may also be running a business that has succumbed to what’s an increasing problem amongst supply chain merchants, namely SKU proliferation. This is when, in an effort to attract more customers and keep existing ones satisfied, you end up with more items in your inventory than you actually need. At its worst, SKU proliferation becomes burdensome at some point because the benefits of adding new products are outweighed by the negatives, for example in the form of obsolete or slow-moving inventory, higher overheads, increased order cycle times and additional and unnecessary order fulfilment complexity.
Knowing which stock items are worth retaining and which should be discontinued is critical if a business wants to operate at maximum efficiency and reach its full profit‑generating potential. In pursuit of these goals it’s also important to be very selective when deciding what items should be added to the inventory mix.
Gaining those insights can, however, be quite challenging. How can you be certain that a particular product line is earning its keep, and how can you be sure that discontinuing a specific item really is the smart thing to do?
These days plenty of businesses, both large and small, rely on SKU (Stock Keeping Unit) rationalisation to answer those questions. At its core SKU rationalisation is a process to determine which products to keep and which to dump, all with the ultimate goals of streamlining operations, enhancing efficiency, improving cash‑flow and boosting the bottom line. Consider it like a spring cleaning of your inventory and as a major component of your Product Life Cycle Management.
So how do you go about sales ranking your products? To make a SKU rationalisation exercise worthwhile, there are several steps that are worth following. Let’s go through these.
Collect SKU data
You’re no doubt familiar with the 80/20 rule – the principal, when it’s applied to business, that 80% of revenue is generated by 20% of customers. For distribution centres and order fulfillment operations, this can often be applied to SKUs in a scenario where around 20% of stock items produce 80% of profits.
Obviously inventory in the 20% category can be pretty much left to alone to carry on their good work. But what about items in the 80% grouping?
Here’s where sales ranking comes in, and a good place to start that is by gathering accurate product cost data. By leveraging the reporting and data analytics capabilities of your ERP system, you should be able to determine the profit margins that you generate for each SKU based on a range of cost factors including those to do with labour, velocity (or turnover), shipping, storage and production of materials.
While it might appear at first inspection that a particular SKU is paying its way, an in‑depth costing analysis may reveal that it actually isn’t. From there, a decision can be made as to whether to retain the item – perhaps because it forms part of an in‑demand portfolio of products – or discontinue it.
Review your marketing
Is it possible that some of your products are failing to fly off shelves because they’re not being promoted properly, or at all? Similarly, might it be the case that some of your SKUs are big sellers because a large proportion of your marketing budget is being allocated to their active promotion?
By conducting a thorough review of your marketing strategy you will be able to determine the direct connection between marketing and sales with all your SKUs. Obviously what you don’t want to do is kill off an item because it’s not selling well when all you really need to do is promote the product more vigorously to prospective customers. A marketing audit should also alert you to instances where the costs of promoting a particular product exceed the benefits you get from selling more of that product than you would absent any marketing.
While you’re at it, it would also be worthwhile to review the marketing tactics you use to reach new customers and retain existing ones. You may discover that a potentially rich source of new business is being ignored, or that your business and its various product lines are being promoted in a way that’s confusing to customers. You may also discover that, say, of the five promotional vehicles you use to advertise and promote your products, only three of them are worth the required investment of time, money and labour.
A thorough review of marketing, followed by a revised and updated marketing strategy, can go a long way to ensuring that none of your SKUs are failing to pull their weight.
Know your competitors
You’re about to introduce a new product that you just know is going to be a hit. But after a few months it’s obvious that it’s anything but that. Something’s not right … but what?
The answer may be that your competitors are doing a better job of making that product an appealing purchase option than you are. Before whisking a product off the shelf due to poor sales performance, it may be worth checking how your competitors are going with it. You may find that one of your main competitors is actively promoting that same product via splashy, difficult‑to‑ignore advertising. Or they’ve discounted the product to a price‑point that makes it difficult for other players to compete for their slice of the pie.
This is another instance where a business can find itself killing off a product for the wrong reasons. By doing a little competitor research you may find that the only thing you need to do to turn a poor‑selling product into a winner is to reduce the price by a small amount or promote it more vigorously.
Be wary of product cannibalisation
Product cannibalisation occurs when a newly introduced SKU leads to diminished demand for, and reduced sales of, an existing product. The more similar the new product is to the older one, the more likely this is to happen.
Product cannibalisation isn’t necessarily bad for business. If a new product proves enormously popular, delivers high margins and brings in new customers, any negative impacts on similar, pre‑existing products may be offset tenfold by the benefits the new product brought to the business.
As part of your SKU rationalisation keep an eye out for instances of product cannibalisation. You may find that you have a lot of items in stock that no longer need to be there for the simple reason that customers much prefer the similar, more recently introduced product. Sales ranking your products may also produce a welcome side‑effect in the form of diminished choice paralysis, which is when customers become overwhelmed at the number of choices available to them and fear making the wrong selection. The fewer options there are available the more likely it is that they will feel comfortable with the choice they made.
The final word...
Sales ranking your products is about much more than identifying redundant or ultra slow‑moving stock items and pulling them off shelves. It’s about making well‑informed, data‑driven decisions about what inventory items to carry based on multiple criteria, all with the aim of improving cash flow, enhancing efficiency, streamlining operations and, ultimately, boosting the bottom line.
For the best long-term results, it is suggested that a SKU rationalisation be carried out regularly – at least once a year. By viewing this exercise as an essential product management activity and by giving it the necessary attention and focus you will reap rewards that make the time and effort put into it more than worthwhile.