In retail, SKUs are what make the world go round. But that doesn’t mean that they’re easy to deal with. In fact, SKU management is one of the most challenging areas in fulfillment for all retailers, regardless of their product catalog.
The most common problem? SKU proliferation.
Every time that a retailer makes the decision to add a product to their range, this spawns many extra SKUs that need to be added to their inventory management system. But what happens when all these SKUs become too difficult to manage?
In this post, we’re going to explore the common causes of SKU proliferation, and when you need to start considering a SKU rationalization strategy to streamline your inventory and fulfillment.
SKU proliferation is when a retailer experiences growth in the depth and/or breadth of their SKUs (Stock Keeping Units).
It’s important to note that SKU proliferation is not necessarily a bad thing. As a business grows and expands to more selling channels, it’s inevitable that their product offerings are going to increase in response to consumer demand. By staying on the cusp of what consumers want, retailers can gain a much more competitive edge.
But if SKU proliferation isn’t managed effectively, this can cause all kinds of problems that can affect your profitability – and even customer satisfaction.
For more about SKUs, check out our SKUs explained guide.
Here are some of the most common circumstances that cause SKUs to spiral out of control:
It’s easy for retailers to fall into the trap of thinking that more SKUs equals more sales. This is especially common in ecommerce, where consumers have grown used to extensive product catalogs from the likes of Amazon and Target.
While adding new lines of SKUs can widen your appeal, it’s also important to factor in that consumers expect constant availability; if a product isn’t in stock and ready to go, they’re going straight to one of your competitors. Fear of this happening causes many retailers to hoard excess stock ‘just in case’, which drives SKU proliferation.
Some product categories, such as fashion, cosmetics, and technology, are highly trend-driven and require retailers to respond quickly to what’s happening in the marketplace. For example, if a fashion retailer is dropping a new collection every 4-6 weeks, this requires a huge number of SKUs to be added on a regular basis. Unless inventory is managed very closely to remove SKUs when a style is no longer in circulation, this is going to cause SKU counts to grow exponentially.
If you aren’t tracking how quickly your SKUs are moving or turning over, it’s impossible to know whether it’s worth launching a new promotion to increase selling activity – or if you should remove that SKU entirely. This means that many SKUs are left in place for too long and end up stagnating due to a lack of demand. In short, retailers are unsure when is the right time to cut their losses and move on.
SKU rationalization is the process by which a business decides whether or not to keep certain SKUs or eject them due to a lack of profitability. This involves weighing up several factors, including the cost of fulfillment, demand consistency, and return rates.
You can read more about SKU rationalization in our dedicated guide.
If your SKUs are becoming more difficult to manage, you’re probably asking the question: “When is the right time to start thinning out my inventory?” This is a very good question – and one that a lot of retailers struggle with.
Here are some good indications that’s time for you to rationalize your SKUs:
The more SKUs you have, the more data there is for your business to sort through in order to build a picture of what’s happening with your inventory. If your SKUs have proliferated to the point where systems are struggling to effectively measure how SKUs are moving, this makes it extremely difficult to make accurate sales forecasts. It’s also a clear sign that you need to look at reducing your inventory.
As your inventory grows, this has big implications for the rest of your fulfillment operation. As SKU counts go up, you’ll need increased capacity to store them, which could force you to lease extra warehousing space. In addition to higher storage costs, this can also lead to more complex inventory management if you’re forced to keep your SKUs in different locations. Furthermore, more stock also means that more staff and more automation are required to manage the higher risk of inaccurate fulfillment. If these expenses are beginning to escalate rapidly, you need to revisit your inventory.
If there’s a growing number of SKUs that are seeing little to no movement, this is costing you valuable storage space and revenue. It’s a common situation when SKUs proliferate because consumers are able to choose between several versions of what is essentially the same product. When this happens and stock levels aren’t adjusted accordingly, SKUs can move slower and slower until they stop altogether.
As a huge ecommerce marketplace for the latest in luxury fashion, Moda Operandi has always had to grapple with the challenges presented by SKU proliferation. Due to stocking high numbers of couture garments which might number only a few units, Moda is consistently having to create new SKUs while managing their existing ones to prevent uncontrolled proliferation.
“As a large and highly seasonal fashion retailer, Moda Operandi presented a really interesting challenge for us,” says Brian Weinstein, Vice President of Business Development at Port Logistics Group/Whiplash. “They have six seasons over the calendar year, and also need unique SKUs generated for custom items – where only one unit may be available. This requires careful management to ensure that SKU counts don’t spiral rapidly.”
By utilizing the real-time inventory management capabilities of the Whiplash platform, Moda was able to successfully rationalize its SKUs from 200,000 down to 30,000-40,000. This has allowed for much greater insight into SKU performance and more informed decision-making around their sales and marketing strategies.
For more about Moda Operandi, read our full case study here.