SKU Rationalization: Optimize Product Portfolios For Growth

As an FMCG entrepreneur, ensuring that your product range is both profitable and scalable is key to sustaining growth. One essential process that plays a pivotal role in achieving this goal is SKU rationalization. This concept may sound technical, but at its core, it involves analyzing and optimizing the Stock Keeping Units (SKUs) your company offers to improve efficiency, reduce costs, and boost overall profitability.

Let’s dive into SKU rationalization, understand how it works, and explore how you can use it to streamline your product portfolio and focus on what drives your business forward.

What is SKU Rationalization?

SKU rationalization refers to the process of reviewing and optimizing the range of products or SKUs a company offers. The two primary steps involved in this process are:

1. Analyzing: Assessing each SKU to understand its contribution to the overall sales, profitability, and market demand.

2. Optimizing: Streamlining the product portfolio by eliminating underperforming products and focusing resources on the most profitable and popular SKUs.

By performing SKU rationalization, FMCG companies can ensure that their offerings align with customer demand, reduce excess inventory, and improve margins, all while positioning the business for long-term success.

How to Approach SKU Rationalization

Here’s a practical, step-by-step guide to SKU rationalization for your FMCG business:

Step 1: Analyze Your SKUs

Begin by identifying the SKUs in your portfolio and categorizing them based on their sales performance. Here’s how to break it down:

• High-performing SKUs: These are the top products that generate the majority of sales, usually contributing to 70-80% of your total revenue. These SKUs are the core of your business and should remain a focal point.

• Underperforming SKUs: These products contribute very little to your sales and could be taking up valuable shelf space or stock resources without providing adequate return.

Use tools like sales data, volume analysis, and profitability assessments to identify which SKUs fall into these categories. This will give you a clearer picture of where to focus your efforts.

Step 2: Evaluate Sales Trends and Product Lifecycle

Next, it’s crucial to analyze the sales trends of each SKU to determine its position in the product life cycle:

• Growth Stage: Products with increasing sales typically fall into the growth stage. These products should be prioritized as they have potential for further expansion.

• Maturity Stage: Products with stagnant sales may be in the maturity phase. Although they still provide steady revenue, consider whether these SKUs can be revitalized or require optimization.

• Decline Stage: If a product’s sales are steadily decreasing, it may be in the decline phase. Assess whether this product should be phased out to make room for more profitable alternatives.

By identifying where each SKU stands in the product lifecycle, you can make better decisions on which products to keep or discontinue.

Step 3: Assess Profit Margins

Another key factor in SKU rationalization is understanding the gross margin for each product. Profit margins are influenced by manufacturing and distribution costs, so consider the following:

• Healthy Margins: SKUs with good margins are typically the most profitable. If a product shows strong sales and healthy margins, it's a keeper.

• Unhealthy Margins: Products with low or declining margins may be draining resources. Investigate if high manufacturing or distribution costs are driving down profitability. If the margins can’t be improved, it may be best to remove these SKUs from your portfolio.

By analyzing the gross margins of each product, you’ll be able to identify which SKUs are worth the investment and which ones need to go.

Step 4: Eliminate or Revise Low-Performing SKUs

Once you’ve identified the underperforming SKUs, it's time to make some tough decisions. You can:

• Eliminate: Completely remove SKUs that consistently show declining sales, low profitability, or that no longer align with your brand’s strategic direction.

• Revise: For some SKUs, it may be worthwhile to make adjustments, such as improving product quality, rebranding, or targeting new market segments.

Focus on streamlining your portfolio to prioritize products that contribute to profitability, customer satisfaction, and long-term growth.

Step 5: Reinvest Resources into Top Performers

After rationalizing your SKUs, the next step is to reinvest resources into your top-performing products. This could involve:

• Increasing production capacity for high-demand items.

• Improving distribution channels to make top products more readily available to customers.

• Enhancing marketing efforts to strengthen the brand presence of best-selling products.

By concentrating your efforts on a smaller range of high-performing SKUs, you can scale more effectively and maximize returns.

Benefits of SKU Rationalization

Implementing SKU rationalization offers several key benefits:

1. Increased Profitability: By focusing on the most profitable SKUs, you can boost margins and improve overall financial health.

2. Efficient Inventory Management: Reducing the number of SKUs helps optimize inventory levels, reducing stockouts and excess inventory.

3. Improved Focus: A streamlined product range allows your team to focus on promoting and improving the products that matter most.

4. Better Customer Experience: Offering a more curated and relevant product range ensures that customers can easily find what they need, enhancing customer satisfaction.

Conclusion: Making SKU Rationalization Work for You

SKU rationalization is a powerful strategy for any FMCG entrepreneur looking to refine their product portfolio, increase profitability, and scale their business more effectively. By understanding which products contribute to your bottom line and which ones are dragging you down, you can make informed decisions that will lead to a more focused, profitable, and scalable business.

Stay proactive, monitor your portfolio regularly, and adapt your product offerings as market trends change. With the right approach to SKU rationalization, your FMCG business will be on the path to greater success and growth.