What makes you walk into a store? Is it the smiling sales person, the bright indoor lighting, or attractive merchandise? While interior décor and snazzy advertising undoubtedly play a role, window shoppers only become regular shoppers because of the lure of the content on the shelves. After all, aren’t the products themselves the biggest draw and ultimately the deciding factor in the success or failure of a retail enterprise? Stocking the right inventory, therefore, is the key to attracting a customer’s interest, retaining their loyalty, and winning traction and market share in an increasingly overcrowded marketplace.
Over the last few decades, retailer have steadily increased the number of stock keeping units (SKUs) they offer. This has been a natural consequence of a worldwide increase in consumer demand for greater variety and more options of a product as well as shorter production lifecycles. Maintaining large inventories constitutes the most significant investment for the retail sector and managing them efficiently can be a major source of concern. Up to 35% of the total inventory is concentrated in the form of non-performing, slow moving stock keeping units (SKUs). With a cumulative contribution from these SKUs to sales being less than five percent, retailers need to find ways to rationalize their stocks.
SKU Rationalization is an innovative technique to streamline inventory management. It helps retailers optimize their assortments by decommissioning some of the non-productive/non-performing merchandise. SKU rationalization uses carefully selected parameters to judge whether an SKU is performing well and then prescribes a lean course of action whereby retailers can add, maintain, or remove SKUs as required. This process minimizes unnecessary inventory investments, while maintaining and addressing the demands and expectations of customers. An effective rationalization exercise helps address potential SKU obsolescence, besides mitigating the risks associated with physical damage and depreciation.
Towards SKU Rationalization: Understanding the Rationale
A proactive retail inventory rationalization plan, addresses the challenges of shelf-space inequities and helps highlight potential out-of-stock issues – two significant concerns that have a major impact on consumer demands and interactions. In addition, it also helps overcome competition from rival, well-stocked stores, and enables manufacturers drive innovation by enabling them to drop the slower moving products in favor of newer options and varieties.
An effective optimization roadmap needs to account for:
- Seasonal and regional variations in tastes and preferences
- Market basket choices for both ‘loyal customers’ and ‘influencers’
- Segmentation, substitutability, and the strategic role of each product
- The optimal number of SKUs and sales and profit productivity
Unlocking Business Value: Optimization in Action
An optimal SKU rationalization initiative calls for an enhanced degree of synergy between the retailer, the manufacturer, and a third-party specialist who is in a position to balance the different competing interests and factors. Once the right team is in place, retailers seeking to optimize their inventories and unlock business values need to:
- Analyze the available SKU categories and inventory turnover. With a deeper understanding of the inventory processes and classes/subclasses at the store, and equipped with a category-level analysis of SKUs, they can move on to the next step.
- Channelize the data emerging from the category-wise revision of both existing and discontinued SKUs. The review of the category-wise buying decisions and the insights derived from the supply analysis of the merchandising process would then lead to the emergence of a clear plan of action.
- Implement the action plan, which should ideally be a multi-pronged, holistic approach that would initially consist of a review with the merchandising team on the SKUs identified for delisting and a mechanism to ensure that no re-orders are triggered. This would be followed by the creation and implementation of an inventory savings and monitoring framework, and a store-level implementation of the plan. Finally, the overall SKU rationalization would be deployed to ensure the desired business outcomes.
Optimal Shelves: A View of the Future
It’s important to remember that while important, a SKU rationalization process by itself cannot be a simple, mechanical process, and that a truly ‘optimal’ shelf cannot be envisaged and created by a single software solution. However, as the degree of visibility in the movement of an inventory item continues to increase, we may expect significant insights on such key factors, including shelf-space utilization, profit and sales contribution, and overall margins. Pervasive data collection across organizational hierarchies using a customized software solution with advanced analytics to drive actionable insights, and inventory optimization algorithms, can be particularly useful in this regard.
With the resultant increase in net cash flow benefits, and an enhanced inventory turnover ratio, businesses can then look to an optimal inventory lifecycle, one which frees up key resources without compromising on customer satisfaction. After all, isn’t that what an optimum ‘shelf’ is supposed to achieve?