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Biggest SKLUsers: SKU Rationalization

SKU Rationalization

Project Outline

  1. Our initial analysis indicated that they had a high concentration of strong performing SKUs (70.63% of sales came from the top 25% of SKUs) and a significant number of low performing SKUs (1.47% of sales came from the bottom 25% of SKUs). SKU Analysis Presentation.
  2. The next analysis (slide #2) showed why SKU rationalization was so important.  More SKUs don’t necessarily increase sales.  In fact they can reduce sales.  This graph shows weekly sales of certain SKUs and the shelf space gap.  High sales items were getting squeezed on shelf space to accommodate low performing SKUs.  This caused stock-outs of the high performing SKUs.  A customer cannot buy something that is not on the shelf!
  3. Other analysis we did quantified that the costs associated with buying, transporting, warehousing and handling this SKU make the net profit of low performing SKUs negative.
  4. We ran a Multi-Variable Pareto analysis to calculate what SKUs should be eliminated and which ones should get more shelf space.  Multi-Variable analysis ensures that we are focused on all aspects of SKU performance.  Sales $, unit volume and margin are all important factors when ranking SKUs.
  5. Finally, we put in place our “Control Plan”, which ensures that this is will be an ongoing process, not a one-time project.  The process flow map shows a process that occurs every quarter, beginning in the Retail Analysis Group going to their  Merchandising Group and finishing in the Stores.  This process reruns the Mutli-Variable Pareto analysis and constantly evaluates SKUs for elimination.

Lessons Learned

We all learned that evaluating SKUs for elimination is a sensitive subject.  It is a lot easier to add an item for sale than to eliminate it.  There is always a reason to keep an item on the shelf.  It does generate sales and the costs associated with this sale are not readily visible.  Also, there are a few customers that buy this item that will be disappointed if it is gone.

However, without the math and discipline to go through this exercise continually, a company will find itself with more items, perhaps more sales, but costs growing much faster than sales.