SKU rationalization is the process of analyzing your product catalog and deciding which products to keep, reduce, or remove. Businesses do this to cut costs, improve efficiency, and focus on their best-selling items.
Many retailers and brands struggle with too many SKUs. While offering variety can be good, having too many products can lead to wasted space, higher costs, and slow inventory turnover. SKU rationalization helps businesses manage their inventory smarter.
If your business carries too many SKUs or struggles with high inventory costs, this guide will help you streamline your catalog and improve profitability.
What Is SKU Rationalization?
Stock keeping unit (SKU) is a unique identifier assigned to each product in a company’s inventory. Every size, color, and variation of a product has its own SKU.
SKU rationalization is the process of evaluating SKUs to determine which ones should remain in the product catalog and which should be removed. Businesses do this to:
- Reduce storage costs by removing slow-moving inventory
- Improve operational efficiency by simplifying stock management
- Increase profitability by focusing on high-performing products
Not all products are worth keeping in stock. Some have low sales, take up warehouse space, and cost more to store than they generate in revenue. SKU rationalization helps businesses identify and remove these unprofitable SKUs.
Why Too Many SKUs Can Hurt Your Business
Many businesses add SKUs to meet customer demand. However, over time, this can create problems:
1. Higher Storage Costs
A high number of SKUs mean more warehouse space is needed. Holding onto slow-moving SKUs increases costs without adding value. Businesses pay for shelving, security, and insurance on products that barely sell.
2. Slower Inventory Turnover
When inventory turnover is low, cash gets tied up in unsold stock. This means businesses have less money to invest in high-performing products.
3. More Complex Operations
Too many SKUs make inventory management, restocking, and order fulfillment harder. Employees spend more time tracking, organizing, and handling products, increasing labor costs.
4. Lower Sales Per SKU
When customers have too many choices, they may feel overwhelmed and indecisive. This can hurt sales. A simpler, well-curated catalog helps customers find what they need faster.
5. More Product Waste
Products can expire, become outdated, or go out of style. If they don’t sell, the business must discount them or throw them away, leading to lost profits.
Reducing unnecessary SKUs can help lower costs, improve efficiency, and boost revenue.
How to Perform SKU Rationalization
SKU rationalization follows a structured process to ensure the right products stay while underperforming SKUs are removed.
1. Analyze Sales Data
Look at sales reports, revenue, and profit margins for each SKU. Ask:
- Which SKUs generate the most sales?
- Which SKUs have declining demand?
- Which products have the highest profit margins?
If a product sells poorly and consumes too much warehouse space, it may be time to discontinue it.
2. Check Inventory Turnover Rates
Inventory turnover shows how quickly a product sells and gets replaced. Low turnover means the product sits too long in storage.
If a SKU has low turnover and high holding costs, it should be evaluated for removal.
3. Identify Redundant SKUs
Many businesses have too many similar products. For example, a clothing retailer may sell ten variations of black jeans, but only three are popular.
Reducing redundant SKUs streamlines inventory and frees up storage space.
4. Consider Storage and Carrying Costs
Every SKU has costs beyond production, including:
- Storage fees (warehouse space)
- Handling costs (employee labor)
- Holding costs (insurance, depreciation, security)
If an SKU is expensive to store and doesn’t generate enough revenue, it may be better to remove it.
5. Use Inventory Management Software
Manual SKU tracking takes too much time. Inventory management software helps businesses:
- Monitor SKU performance in real-time
- Identify slow-moving products
- Forecast demand and automate stock levels
This eliminates guesswork and makes SKU rationalization more efficient.
The Benefits of SKU Rationalization
1. Lower Inventory Costs
Fewer SKUs mean lower storage, handling, and insurance costs. Businesses save money by keeping only the most profitable products.
2. Faster and More Efficient Operations
With fewer SKUs, order fulfillment, restocking, and warehouse management become easier. Employees spend less time managing inventory, reducing labor costs.
3. Improved Customer Experience
A simpler product catalog makes shopping easier. Customers find what they need faster, increasing satisfaction and sales.
4. Higher Profit Margins
By focusing on high-performing SKUs, businesses make more money with fewer products.
5. More Accurate Demand Planning
A streamlined catalog makes it easier to predict future demand, helping businesses stock the right products at the right time.
AI and SKU Rationalization
Artificial Intelligence (AI) is transforming inventory management and SKU rationalization by making the process faster, more accurate, and data-driven. Instead of relying on manual SKU reviews—which are time-consuming and prone to human error—businesses can use AI-powered tools to analyze sales trends, predict demand, and optimize stock levels with greater efficiency.
1. AI Analyzes Sales Trends and SKU Performance Automatically
One of AI’s biggest advantages is its ability to process vast amounts of sales data instantly. Businesses with thousands—or even millions—of SKUs can’t realistically track and analyze each product manually. AI-powered inventory management software can:
- Identify which SKUs sell the most and which are underperforming
- Detect seasonal trends and fluctuations in demand
- Compare SKU performance across different locations or sales channels
Instead of relying on gut instinct or reviewing spreadsheets line by line, businesses can use AI to generate reports and insights in real time, making SKU rationalization much more efficient.
2. AI Predicts Future Demand Using Past Sales Data
Traditional inventory planning relies on historical sales data, but AI takes it a step further. AI-powered forecasting tools don’t just look at past sales—they also analyze:
- Market trends and consumer behavior
- Seasonal fluctuations and economic shifts
- Industry benchmarks and competitor sales data
With this information, AI can predict which SKUs will continue performing well and which ones are likely to decline in demand. This helps businesses make proactive decisions about whether to keep, reduce, or discontinue a product.
3. AI Identifies Slow-Moving Products and Suggests Removals
One of the hardest parts of SKU rationalization is deciding which products to cut. Businesses often hesitate to remove SKUs, fearing they might lose potential customers or hurt brand perception. AI removes the guesswork by providing clear, data-backed recommendations on which SKUs to remove.
- AI identifies low-performing SKUs by tracking:
- Sales velocity – How quickly a product sells
- Holding costs – How much it costs to store an item
- Customer demand – Whether customers are still buying the product
- Profitability – Whether an SKU generates enough profit to justify its storage and production costs
If an SKU is costing more than it’s earning, AI can flag it for removal or reduction. AI can also suggest product bundling—grouping slow-moving products with bestsellers to clear inventory without heavy markdowns.
4. AI Optimizes Stock Levels to Prevent Over-Ordering
Over-ordering is a common issue in inventory management. Businesses often stock too much of a product, thinking it will sell, only to realize later that demand wasn’t as strong as expected. This leads to excess inventory, high storage costs, and potential waste.
- AI helps prevent over-ordering by:
- Tracking real-time sales data to adjust stock levels dynamically
- Using predictive analytics to estimate how much inventory is needed for each SKU
- Recommending automatic reorder points based on demand forecasts
This helps businesses maintain lean inventory levels, reducing carrying costs and the risk of dead stock.
Common Challenges in SKU Rationalization
Even though SKU rationalization has many benefits, some businesses struggle with implementation.
1. Fear of Losing Customers
Some companies worry that removing SKUs will drive customers away. But too many choices can cause confusion. A smaller, more focused catalog often improves the shopping experience.
2. Resistance from Sales Teams
Sales teams may resist removing products, even if the data shows low sales. Educating teams on the benefits of SKU rationalization can help overcome this challenge.
3. Lack of Accurate Data
Without proper inventory tracking, businesses struggle to make informed decisions. Using inventory management software ensures accurate data collection.
When Should Businesses Perform SKU Rationalization?
Businesses should review their SKUs regularly. However, certain times are ideal for SKU rationalization:
- After peak sales seasons (to identify slow-sellers)
- Before launching new products (to make room in inventory)
- When storage costs rise (to reduce unnecessary stock)
- During warehouse reorganization (to improve efficiency)
By making SKU rationalization a routine process, businesses stay profitable and efficient year-round.
Final Thoughts
SKU rationalization is essential for optimizing inventory, cutting costs, and improving profits. By focusing on high-performing SKUs and removing unnecessary stock, businesses can streamline operations and increase efficiency.
With the help of AI and inventory management software, businesses can automate SKU tracking, improve demand forecasting, and make better stocking decisions.
If your inventory is too large and costly, now is the time to evaluate your SKUs, remove the waste, and focus on what truly sells. Speak to an expert at Toolio today!
