Full Life Cycle SKU Rationalization for Retail Providing a sustainable process for managing SKUs

Historically, companies have lacked the structured, detail level information necessary to carry out comprehensive SKU Rationalization programs. In general, systems have not been able to scale to provide accurate SKU and customer or channel profitability numbers on more than a one time basis, so organizations have not been able to systematically validate the information on an ongoing basis. Additionally, sufficient detail to explain “how” and “why” specific SKUs were unprofitable or marginal has been hard to come by. Finally, companies could not provide an environment to continuously monitor and assess rationalization decisions cost effectively.

In addition to these challenges, SKU profitability usually means gross margin, which doesn’t take any trade deal funding, promotional allowance or volume discounts into account. Also, typical SKU rationalization efforts do not account for supply chain differences. For example, assume we have two SKUs that have similar volume and gross margin characteristics. One is a special order and is not available for EDI ordering from the vendor, has very little trade funding behind it, requires special handling at the warehouse and has a large shelf footprint. The other is on a full year trade deal schedule, is fully integrated into the order/replenishment process, is often cross-docked and almost always handled in full pallets and has a small shelf footprint. When all these aspects are taken into account, the first SKU is far less profitable than the second.

SKU Rationalization is a recurring and important topic for all retail companies. The simple fact is that all SKUs outlive their usefulness -- it’s just a matter of when -- and some SKUs never should have been. If you consider the 80/20 rule as it applies to the SKUs in a retail operation, the issue becomes even more important.

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