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Chapter-8 Rationalization of SKU

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Contents
Contents ........................................................................................................................... 3
Chapter-8 Rationalization of SKU ......................................................................................... 4
Introduction ...................................................................................................................... 4
Learning Objectives: ......................................................................................................... 4
8.1 Overview ..................................................................................................................... 5
8.2 Key Considerations for SKU Rationalization .......................................................... 5
8.3 Parameters to Choose SKU Categories Carefully .........................................................6
8.4Best Practices in SKU Rationalization ........................................................................... 7
8.5 Life Cycle of SKU Rationalization ................................................................................ 7
8.6 Challenges and Limitations of SKU Rationalization ............................................. 10
Summary ........................................................................................................................ 11

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Chapter-8 Rationalization of SKU

Introduction
This chapter gives you a brief idea of what is SKU Rationalization, what are the key
considerations that need to keep in mind in SKU rationalization, what are all the parameters
that are affected in rationalization and on what parameters we choose SKU categories.
This chapter will also give the clear idea on life cycle of SKU rationalization and the steps
that are involved in it, what are all the challenges that retailers face when they go for
rationalization and limitations that we have for rationalization.

Learning Objectives:
Through this chapter we will be able to know:
What is SKU Rationalization
Key considerations to be followed in SKU Rationalization
Parameters that effects SKU Rationalization
Life cycle of SKU Rationalization
What are Challenges and Limitations of SKU Rationalization



















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8.1 Overview

Supply Chain offers numerous opportunities for costreduction, inventory being the major
one. Most inventory issues can be traced back to inefficientassortment, large stocks on slow
moving SKUs (Stock Keeping Units) and stock outs for others.The inherent question then, is
how much is too much and by how much the SKUs should be reduced.The key is to
eliminate duplicate SKUs and motivate healthy customer behavior.

SKU rationalization can be defined as a process used by the company to determine the
benefit of adding, retaining, or deleting products.It should be able to determine the
products which are profitable to the company and products that have a negative impact
on its business.SKU rationalization helps companies to identify those SKUs which
increase its share of the profits earned and add value.

The following parameters are affected by SKU rationalization:
Overall Discount
Logistics Cost
Warehouse/Inventory Charges
Yearly Planning Process
8.2 Key Considerations for SKU Rationalization

Clustering Retailers have realized that the traditional one size fits all approach leads to
excessinventory for some stores and stock outs for others. Clustering enables retailers to
group storeswith similar characteristics together. Most retailers currently use loyalty
information to clusterstores based on a single parameters such as ethnicity, though this
works fine for ethniccategories such as shampoos, it does not work with categories like cold
remedies. Factorsinfluencing each category should be analyzed to form meaningful
clusters.Clusters should be aligned with customer needs and behaviors to
tailorassortments.

Clear Strategic Direction- Retailers must have a clear idea of how they want to be viewed
in a particulardepartment. They need tounderstand if the category needs to be high on
variety or if it needs to be high on availability ora balance between both. This direction has
to be incorporated in the assortment plan.

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Optimization Traditional method of weighted ranks for delisting SKUs does not balance
various parameters such as performance (sales value, volumes, and margins), inventory, in
stock andout of stock rates, and other parameters like customer loyalty and space elasticity
and so on. The Weighted Ranking method is often skewed by the weights assigned which
are based on userdiscretion. Hence an optimization technique needs to be adopted which
considers all the otherparameters other than pure performance.

Space Constraints - Often Assortment plans are made without first considering space
restraints. This process leads to compromised, suboptimal assortments and poor facing
allocation resultingin out-of-stock situations and customer frustration. However,
collaboration is the key when it comes to integrating assortment and space planning.
Assortment planning and space planning are usually carried out by separate departments,
eachmastering the skill in that area.

Implications of delisting SKUs- More often, retailers shy from SKU rationalization exercise
dueto the fact that they are high on inventory of the slow moving SKUs. If these are
delisted, marking down such SKUs would increase the overall costs rather than decreasing
it. Hence it isessential to consider the markdown costs of delisted SKUs when rationalizing
the assortment.
8.3 Parameters to Choose SKU Categories Carefully

Sales Value: This reflects the average category sales volume per store an increase
in high-volume categories can deliver higher-value growth.
Sales Diversity: Variations in sales volume and composition drive facing and
capacity requirements.
Fixture Density: A number of different planogram sizes are required to address the
variety of actualstore requirements.
SKU Density: A higher number of facings per SKU enable more flexibility in meeting
inventoryrequirements
Excess Inventory: Categories with large excess inventory in the brown boxes above
the shelf to be considered.

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8.4Best Practices in SKU Rationalization
There are 5 basic steps endorsed and adopted by Food marketing Institute and Global
Market Development Center as best practices in SKU rationalization.

1. In the first step Identification and an analysis of consumer purchase decision
hierarchy should be done through a primary research.
2. Find out the optimal number of products in each category and each major segment
by conducting a diminishing returns analysis.
3. Determine the level of substitutability of each item and brand in different
categories before the finalization of the SKUs
4. Check the profit, sales and earnings associated with each brand, product as an input
for selection of SKUs.
5. Complete the entire process using the inputs available from the above steps and
using overall strategic goals of the organization.
8.5 Life Cycle of SKU Rationalization

SKU Rationalization begins with scoping and benefit quantification and ends with the
realization of theidentified benefits. The life cycle of a SKU Rationalization initiative
involves the following steps
Figure 1:. SKU Rationalization life cycle

Stage 1: Scoping and Benefit Quantification
Scoping refers to the identification of non-performing SKUs, and involves defining a
criterion foridentifying and sorting underperforming (or non-performing) SKUs on the basis
of a set of parameterssuch as the annual sales (units and/or dollar amount), gross margins,
space productivity, inventoryturnover ratio, sales to inventory ratio, shelf life and so on



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Stage2: Planning

Preparation of Detailed Implementation Plan for SKU Rationalization
Once the retailer has signed off on the business case and roadmap for the SKU
rationalization has been initiated, adetailed implementation plan should be developed. Key
components that should be considered in the development of a comprehensive
implementationplan include:
Scope of Implementation: Detailed Work Breakdown Structure (WBS) plan with
responsibility assignment (RACI) matrix should be made.
Staffing Plan: Staffing requirements and organization structure
Governance Model: Details of what to communicate, when to communicate, and
whom to communicate to are to be decided.
Benefit Measurement Approach: Identification and selection of benefit
measurement methodology. The document should cover detailed methodology,
definition of the data points to be captured, and the schedule/timelines of benefit
measurement along with the communication plan
Stage3: Execution

Buy-in from Stakeholders

This is the stage where consensus should be reached at all levels of management.
Buy-in typically refers to all those exceptional SKUs that provide a competitive edge to the
retailers and aretherefore the must-haves, irrespective of their margins and sales.
Execution of the SKU Rationalization Program
The execution of an SKU Rationalization program involves the systematic discontinuation
ofrationalized SKUs and the depletion of the associated inventory.
Rationalized SKUs end their life cycle in the following manner:







Figure 2: Ending of SKU Rationalization life cycle

The reason for having the intermediate status Inactive is to buy some time to deplete the
inventoryincrementally, preferably through mark-down sales. The replenishment however
should be stoppedimmediately. There may still be some movement of inventory from
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warehouse to store. Once the retailer depletes itsinventory completely from all its
warehouses and stores, it may mark the SKUs as Discontinued in thesystem.

Stage 4: Realization

Benefit Measurement of the SKU Rationalization Program:

One of the key success factors for a SKU Rationalization program is the development and
monitoringof inventory reduction metrics. The inventory reduction measurement
mechanism should be simple andeasy to quantify so that the key stakeholders are able to
measure the success of the program on an incremental basis.
Although the benefit measurement mechanism is customized for each retailer depending
on its line ofbusiness and dynamics, some of the more commonly used benefit
measurement mechanisms include:
Inventory Depletion Measurement for Rationalized SKUs Only:
This approach tracks inventory depletion of the rationalized SKUs. It provides a quick
understanding ofthe impact on the inventory of the rationalizedSKUs and thus helps to
incrementally implementand realize the business case on a week-to-week basis.
Holistic View of SKU Rationalization- impact at the Organization Level
This measurement provides a holistic view of the inventory and is used for tracking and
decision makingpurposes at the organization level. This view helps drive the overall
inventory strategy at the organizationlevel. It purposely avoids providing a view of only
those SKUs that are rationalized; just to make surethat the bigger picture view of the
impact is not sidelined.
Holistic View Assessment based on the Review of Inventory Turns*-Improvement
from the SKURationalization Program
In this approach a baseline snapshot of inventory data points is taken at the starting stage
of the SKURationalization program. In this baseline, the inventory turns are calculated and a
range is established. After the baseline is set up and mutually agreed upon, the new data
points are refreshed on a quarterlybasis and compared against the baseline to identify the
difference between the two consecutive readings.

{Inventory turns* ---- Cost of Goods SoldAverage Inventory for the Period}

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Table 1: Holistic View Assessment based on the Review of Inventory Turns-
Improvement from the SKU Rationalization Program

This provides a holistic view of how the SKU Rationalization program is impacting the
overallinventory turns for the organization. This view also incorporates the new
itemintroduction factors to make it more comprehensive.
8.6 Challenges and Limitations of SKU Rationalization

Over-Rationalization
Many retailers, in their quest to rationalize slow-moving/under-performing SKUs,
end up overrationalizingtheir products, which may become counter-productive.
What most retailers ignore in SKU.Rationalization is the market basket effect.
Customers easily switch their loyalties elsewhere if they arenot able to find a certain
item or a wider selection, irrespective of the fact that the particular item is aslow-
moving SKU. Wal-Mart is a classic example where, as part of an SKU Rationalization
initiative, it overrationalized and ignored the market basket effect, resulting in
loss of sales.
Credibility Gap
It has been observed that there is a natural distrust amongst different departments
on the number and type of SKUs to be rationalized. Stakeholders feel
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misrepresented. This creates friction across the teams and ends up in half-hearted
efforts which are generally unproductive or at times even counterproductive.

Improper Execution
It is one thing to have a perfect plan on paper and another to execute it in the right
manner. It is common to see projects failing due to improper execution caused by
lack of experience/expertise and monitoring. This results in colossal losses and can
be demoralizing for the organization.

Resistance to Change
Any change in the system faces opposition from internal and external stakeholders.
Organizations, more often than not, ignore the details and/or problems before
implementation and are unprepared for the roadblocks which threaten to dampen
their past efforts and lead to unpleasant situations, and which may end up in a no
win compromise.

Summary
SKU rationalization can be defined as a process used by the company to determine
the benefit of adding, retaining, or deleting products. It should be able to
determine the products which are profitable to the company and products that
have a negative impact on its business.
The Weighted Ranking method is often skewed by the weights assigned which are
based on user discretion. Hence an optimization technique needs to be adopted
which considers all the other parameters other than pure performance.
There are 5 basic steps endorsed and adopted by Food marketing Institute and
Global Market Development Center as best practices in SKU rationalization.
The life cycle of a SKU Rationalization initiative involves the following steps:
Scoping and Benefit Quantification, Planning, Execution, Realization.
Challenges and limitations of SKU rationalization are over rationalization, credibility
gap, improper execution, resistance to change.