How SKU Rationalization Helps in Inventory Management

SKU Rationalization

SKU rationalization in Inventory Management is the process of looking over your current product line and getting rid of any SKUs that are not performing well enough or are not necessary for your catalogue. This process, which is also known as product rationalisation or SKU optimisation, basically establishes whether an item in your inventory should be kept or removed.

An internal tracking and organising system for inventory items uses a unique alphanumeric code called a stock-keeping unit, or SKU for short. Details about a product’s distinctive qualities, such as its cost, brand, style, and so forth, are provided by each SKU. Having said that, each variation of a product is given a unique SKU code; as a result, a single shirt, for instance, may have dozens of distinct barcodes indicating its range of colours and sizes. 

Why is SKU Rationalization Needed?

SKU rationalization is needed for several reasons:

  1. Optimizing Inventory: SKU rationalization helps in managing inventory more efficiently. By eliminating underperforming or redundant SKUs, you can reduce carrying costs and free up warehouse space.
  1. Cost Reduction: It allows for cost reduction by minimizing expenses associated with storing and managing excess SKUs, such as storage space, labour, and handling costs.
  1. Improved Productivity: Rationalizing SKUs streamlines processes, making it easier to manage and fulfil orders. This can lead to improved operational efficiency and productivity.
  1. Enhanced Customer Experience: By focusing on SKUs that have higher demand and relevance, you can ensure that your customers have access to the products they want, leading to higher customer satisfaction.
  1. Better Decision-Making: Rationalization provides data-driven insights into SKU performance, which aids in making informed decisions about which products to retain, discontinue, or modify.
  1. Inventory Accuracy: This leads to more accurate inventory tracking, reducing the risk of overstocking or understocking, which can result in lost sales or carrying costs.
  1. Reduced Complexity: Managing a vast number of SKUs can be complex and time-consuming. Rationalization simplifies the product portfolio, making it more manageable.
  1. Resource Allocation: It allows you to allocate resources, including marketing and promotions, to the most promising and profitable products.
  1. Financial Performance: Rationalizing SKUs can have a positive impact on a company’s financial performance by increasing profitability and reducing unnecessary expenditures.
  1. Sustainable Growth: For businesses looking to grow sustainably, SKU rationalization is essential to focus on the core products that contribute the most to the bottom line.

Benefits of SKU Rationalization

  1. Reduce Overhead Costs

Keeping an eye on inventory costs is critical to the health and longevity of your company. Fortunately, SKU rationalisation can lower overhead costs and enable you to make both immediate and long-term financial savings when carried out correctly (and consistently). 

Your total inventory costs can be reduced by actively trying to reduce the number of items you carry and getting rid of low-demand items (especially carrying or holding costs). Additionally, there won’t be as much waste and spoiling at your warehouse since fewer products will be occupying costly shelf space.

  1. Increase in Profit

Although it may seem paradoxical, selling fewer SKUs can significantly increase revenue. You can make decisions that improve your bottom line when you know which of your products are bestsellers and which ones are stored permanently at your warehouse. 

Additionally, consumers frequently react favourably to fewer product options, so it might be time to part with some SKUs if they aren’t producing a significant profit. You’ll also have more space to create new items or broaden the categories that are doing well.

  1. Operations Management

As a product-based brand, time, space, and energy are some of your most valuable resources. However, if you’re not effectively optimising your inventory, each of these will be wasted. Your brand may experience expensive, intricate, and ineffective operations if you fail to rationalise your SKUs. 

However, putting SKU rationalisation into practice can improve product availability, prevent stockouts, streamline production (as there are fewer items to manufacture), and even improve inventory tracking techniques.

  1. Lifecycle Management

Product lifecycle management is the process of managing a product from the time it is first conceptualised to the time it is designed, manufactured, sold, and eventually retired. You can significantly improve this entire process by utilising SKU rationalisation. 

By breaking down the product lifecycle by type, brand, category, or family, SKU optimisation not only enables business owners to examine it from a much deeper, more detailed scope but also makes replenishment easier because there are fewer items to reorder.

  1. Targeted Marketing Strategies

Because so much inventory data is examined during the process, SKU rationalisation unquestionably results in better, more targeted marketing strategies. Businesses can also work to develop their brand identity with this knowledge in hand and a more focused marketing approach. 

The best way to capitalise on your most well-liked product offerings and establish a reputation for carrying a varied product mix that consistently pleases your customers is to incorporate SKU rationalisation into your inventory management.

Implementing a SKU Rationalization Process

Identify Customer DemandConduct market research to understand customer preferences.Gather direct feedback through surveys, focus groups, or post-purchase feedback.Align your products with customer needs.
Analyze SKUs and Sales DataUse inventory management software for detailed SKU analysis.Gain insights into return rates, inventory turnover, and lead times.Understand the performance of each SKU.
Organize Product Catalogue Based on FindingsGroup SKUs into categories (e.g., keep, remove, review).Gain clarity on which products to retain, discontinue, or revisit.Streamline the optimization process.
Use Data to Drive Decision-MakingMake informed decisions based on categorized SKUs.Adjust prices or discontinue items with data-backed insights.Reduce carrying costs and optimize revenue.


What is SKU rationalization?

SKU rationalization is the process of evaluating and optimizing your product line by determining which items to keep or remove based on their performance and relevance.

Why is SKU rationalization necessary?

It is needed to optimize inventory, reduce costs, enhance efficiency, and improve the customer experience.

How does SKU rationalization reduce costs?

Eliminating low-demand or redundant SKUs reduces carrying costs, storage expenses, and waste.

Can SKU rationalization increase profits?

Yes, selling fewer SKUs that are high-performing can significantly increase revenue and profitability.

What are the benefits of SKU rationalization for operations management?

It streamlines production, improves product availability, and enhances inventory tracking techniques.

How does SKU rationalization impact product lifecycle management?

It allows for a more detailed examination of product lifecycles and makes replenishment easier due to fewer items to reorder.

What role does SKU rationalization play in targeted marketing strategies?

It results in more targeted marketing strategies by identifying best-selling products and improving brand identity.

How can businesses implement an SKU rationalization process?

By following steps like identifying customer demand, analyzing SKUs and sales data, organizing the product catalogue, and using data to make informed decisions.

What’s the impact of SKU rationalization on inventory tracking?

It leads to more accurate inventory tracking, reducing the risk of overstocking or understocking.

Is SKU rationalization essential for businesses looking to grow sustainably?

 Yes, it helps businesses focus on core products that contribute the most to their bottom line, supporting sustainable growth.

Shraddha Thuwal

Shraddha Thuwal

Shraddha Thuwal worked as a content writer at WareIQ. She actively contributes to the creation of blog posts centered on eCommerce operations, fulfillment, and shipping, in addition to providing insights on various strategies and techniques tailored for eCommerce sellers. With an impressive track record, Shraddha boasts over two years of content writing experience, spanning a spectrum of industries including logistics, supply chain, and media.

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