SCOR Best Practice 31: SKU Rationalization and Cost of Sales Analysis

Maintaining an optimal inventory level is crucial for operational efficiency and profitability. One effective practice for achieving this is Stock Keeping Unit (SKU) Rationalization and Cost of Sales Analysis. This inventory-reduction practice focuses on evaluating which SKUs can be terminated to streamline operations and improve financial performance. A loose relationship to this topic can lead to a major increase in complexity to manage the supply chain.

Understanding SKU Rationalization

SKU Rationalization is a process that involves reviewing and analyzing the entire product portfolio to determine which items are underperforming and could be discontinued. This is achieved through a cost of sales analysis, which evaluates the profitability of each SKU based on sales performance and associated costs.

The primary goal of SKU Rationalization is to identify products that are not contributing significantly to revenue or profit margins. These underperforming SKUs often lead to higher inventory carrying costs, increased complexity in inventory management, and reduced overall efficiency. By removing these items, companies can focus resources on more profitable products, leading to a leaner and more effective inventory system.

Key Processes Involved

The SKU Rationalization and Cost of Sales Analysis process encompasses several key activities:

1. Initiate Reports (OE3.2): The first step involves generating comprehensive reports that provide detailed insights into the sales performance and associated costs of each SKU. These reports serve as the foundation for informed decision-making.
2. Plan Supply Chain (P1): Strategic planning is essential to align inventory management with overall supply chain objectives. This includes forecasting demand, optimizing inventory levels, and ensuring that SKU rationalization supports the broader supply chain strategy.
3. Plan Fulfill (P5): Effective fulfillment planning ensures that customer needs are met even as the inventory is streamlined. This involves coordinating with suppliers and logistics partners to manage the transition away from discontinued SKUs smoothly.

Metrics for Success

Several key metrics are used to measure the success of SKU Rationalization and Cost of Sales Analysis:

• Revenue (AM.2.4): By focusing on high-performing SKUs, companies can potentially increase overall revenue.
• Return on Working Capital (AM.1.3): Improved inventory efficiency leads to better utilization of working capital, enhancing financial health.
• Inventory (AM.2.8): Reducing excess inventory helps lower carrying costs and free up resources for other strategic initiatives.

People and Skills Involved

Successful SKU Rationalization requires a range of skills and expertise, including:

• Safety Stock and Replenishment Calculations (HS.0131): Ensuring that adequate safety stock levels are maintained even as SKUs are rationalized.
• Analytical Skills (HS.0162): Conducting thorough cost of sales analyses and making data-driven decisions.
• Cost to Serve (HS.0169): Understanding the total cost of serving customers with different SKUs to identify which products may not be worth retaining.
• Financial Management and Modeling (HS.0173 & HS.0174): Applying financial principles to evaluate SKU performance and project the impact of SKU rationalization on the business.

Implementing SKU Rationalization

Implementing SKU Rationalization involves several practical steps:

1. Data Collection and Analysis: Gather data on sales, costs, and inventory levels for each SKU. Analyze this data to identify underperforming products.
2. Customer Engagement: Work with customers to assess the potential for switching to alternative SKUs or discontinuing certain products. This collaboration can help minimize disruption and maintain customer satisfaction.
3. Decision Making: Based on the analysis, make informed decisions about which SKUs to retain and which to discontinue. Ensure that these decisions align with overall business strategy.
4. Communication and Transition: Clearly communicate changes to all stakeholders, including suppliers, logistics partners, and internal teams. Plan for a smooth transition to avoid operational disruptions.

Conclusion

SKU Rationalization and Cost of Sales Analysis are critical practices for optimizing inventory management and enhancing financial performance. By focusing on high-performing SKUs and eliminating underperforming ones, companies can streamline operations, reduce costs, and improve profitability. Implementing these practices requires a strategic approach, skilled personnel, and effective communication. Ultimately, SKU Rationalization helps build a more agile, efficient, and profitable supply chain.