AI in SKU Rationalisation: Streamlining Inventory by Identifying High-Impact Products

SKU (Stock Keeping Unit) rationalisation is the strategic assessment of product assortments to optimise inventory. By identifying which SKUs contribute positively to sales and profitability, businesses can eliminate inefficiencies and align their offerings with consumer demand.

Within the fast-moving retail landscape, understanding SKU rationalisation is crucial, especially considering that companies performing regular SKU assessments can see profitability increases ranging from 10% to 30%. Additionally, research shows that nearly 30% of a retailer's inventory can be underperforming or unproductive, highlighting the importance of a refined approach to inventory management.

The Upside of SKU Rationalisation: Transforming Challenges into Opportunities

The advantages of SKU rationalisation are multifaceted and can significantly impact a business’s bottom line:

• Profitability Boost and Cost Savings: Focusing on high-impact SKUs leads to reduced carrying costs and improved profit margins.
• Enhanced Inventory Turnover: By phasing out low-performing products, businesses can optimise their inventory turnover ratio, improving cash flow.
• Alignment with Customer Demand: SKU rationalisation allows companies to stock items that resonate with their target audience, enhancing customer satisfaction and loyalty.
• Streamlined Operations: Eliminating unnecessary SKUs simplifies inventory management, allowing teams to concentrate on strategic initiatives.

The Four Pillars of SKU Rationalisation: A Step-by-Step Guide

To successfully implement SKU rationalisation, follow these four essential steps:

1. Step 1: Comprehensive Data Gathering and Analysis
   Collect and analyse historical sales data, customer preferences, and market trends to create an overview of SKU performance.
2. Step 2: In-Depth Performance Evaluation of SKUs
   Assess each SKU's contribution to sales and profitability using metrics such as sales volume, gross margin, and inventory turnover.
3. Step 3: Strategic Decision-Making on SKU Selection
   Based on performance evaluations, determine which SKUs to retain, phase out, or introduce to align with consumer demand.
4. Step 4: Implementation and Ongoing Monitoring
   Execute the SKU rationalisation strategy and establish a system for continuous performance tracking to adapt to real-time data.

The SKU Rationalisation Equation: Calculating Profitability

To evaluate SKU performance effectively, utilise the following formula:

SKU Contribution to Profitability = (Sales Volume x Gross Margin) - Holding Costs

This equation allows businesses to assess each SKU's profitability by considering revenue generation alongside associated costs. By applying this formula, companies can prioritise SKUs that maximise profitability and make informed decisions about their inventory.

Example

Consider a mid-sized consumer electronics retailer that undertook SKU rationalisation. Initially, the retailer carried over 500 SKUs, leading to high carrying costs and low inventory turnover. After analysing their inventory, they identified several underperforming products that were seldom sold.

By applying the SKU contribution formula, they discovered that removing these low-impact items could free up resources for more popular products.

The Results:
After rationalisation, the SKU count was reduced to 350, leading to a 20% increase in profitability and significantly improved inventory turnover.

Key Takeaway: The retailer emphasised the importance of ongoing monitoring and agility in inventory management, along with robust data governance to ensure accurate analysis.

How Merchmix Can Elevate Your SKU Rationalization Strategy

Merchmix stands at the forefront of empowering businesses to streamline their SKU rationalisation process through cutting-edge technology and data-driven solutions. With advanced analytics and AI capabilities, Merchmix offers:

• Superior Data Quality: By ensuring accurate data integration from various sources, Merchmix enables businesses to make decisions based on reliable insights.
• Automated Performance Monitoring: Merchmix provides real-time monitoring tools that allow businesses to continuously track SKU performance and adapt strategies as market conditions evolve.
• Optimal Product Mix Identification: With sophisticated algorithms analysing sales trends and customer preferences, Merchmix helps businesses spotlight high-impact products, ensuring resources are focused on driving profitability.