Private Label Buyer

SKU Rationalization

August 16, 2011

Rationalizing Retail
Running a store is like building a good baseball team. A lot of people, or in this case, products, try out but not everyone makes the cut. That is where SKU rationalization comes into play. An analytical process, SKU (stock-keeping unit) rationalization determines which items need to be added, removed or kept on the shelves.

In order to begin a successful SKU rationalization, a retailer must first collect and analyze product sales data, making sure to look at the profitability of each product, says Scott Gamble, partner at the Beachwood, Ohio-based innovation consulting firm Kalypso. Once data is collected and product profitability is determined, products can be separated into low, medium and high priorities.

Low priority items are products that are doing well and in no need of being replaced. Medium priority items are products that are not outstanding performers financially and so are worth keeping an eye on in the future. Obvious cuts are  products that have not sold for a number of months and are taking up shelf space that could be used for other items, he explains.

After determining which SKUs to cut, a plan then can be devised to weed out the problem products and replace them with new ones.

The process of weeding out products must be specific to each store when considering problem products, explains Craig Espelien, former vice president of business development with the Plano, Texas-based sales and marketing services firm Crossmark.

Retailers should know which SKU’s generate 85 percent of their sales and eliminate all others that do not offer a true differentiation from the top sellers, he contends. This will force all non-store brand SKUs to pass a minimum movement criteria or be selected for dismissal.

While the process of SKU rationalization is not new, it is still not an exact science. One of the highest profile instances of SKU rationalizations in recent years came from Bentonville, Ark.-based retailer Walmart last year. The company’s creation of Project Impact, meant to clean up the shopping environment, resulted in a significant dip in sales.

“Walmart had the right idea,” says Espelien “but the wrong focus in executing the project. The company has since added back almost all of the SKU’s they cut and then added even more SKUs on top of that.” Two main factors led to the downfall of the project, he explains:

• The company did not properly analyze consumer purchasing behavior. This includes looking at a product’s true value by examining  sales when it’s regularly priced and not on promotion.

• The company cut entire brands rather than removing specific items that were not selling in the brand’s portfolio.

Knowing which brands are important to your customers is essential.

Although the rationalization process is often overseen by the chief financial officer (CFO) of the company, many times “the responsibility exists at two levels and may be split across multiple roles. First, SKU rationalization is driven by the choice of which items to buy - a decision largely in the hands of the buyer. Second, SKU rationalization is determined by the ranging of those items to particular stores - this may be a category planner,” states Gamble.

Given that the process involves taking out a product permanently and possibly replacing it with a new one, the executive in charge must be familiar with not only the financial implications of a product but how it will effect the brand portfolio management of the store.

Knowing the right time to start the process also is vital. Since rationalization can involve all products on a retailer’s supply chain, it is more effective to do the procedure with longer-living merchandise in order to accurately track an item’s progress and make reasonable adjustments.

Whether you are a process owner or a CFO in charge of SKU rationalization, the store and all the products within are your team. Each product must play its part in the success of the store. While all will vie for attention, claiming to be the best, it is the numbers and analytics that must determine the future of the product in your store.