SKU Optimization

What is SKU optimization?

SKU (Stock Keeping Units) optimization is the process of managing stock-keeping-units and promoting, retaining, and to improve inventory efficiency, reduce inventory costs, and ultimately store, retain, or discontinue the right product at the right time. It’s like deleting apps on your phone that’s inactive for a long time, making more room for essential apps.

Many inventories and warehouses struggle with excess inventory, not having insights about high performing products, respective profitability, and more. This can become worse for those with too many product offerings, where streamlining every inventory operation becomes chaotic.

That’s where SKU optimization comes in place—helping you avoid overstocking of slow-moving items, free up cash tied, and allowing space for fast-moving product variants.

Example of SKU optimization: A fashion retailer has 2k+ SKUs. They constantly face stock-outs, inventory pileups, and high inventory costs. They implemented best SKU optimization strategies using demand forecasting, data analysis, rationalization, and continuous monitoring through dashboards, which reduced their inventory costs and improved sales.

Is SKU optimization the same as of SKU rationalization?

When businesses have too many SKUs, they will go for SKU rationalization, cutting down SKUs that don’t perform well, so the inventory space can be tied for well-performing items. SKU optimization is more than rationalization, that brings together pricing, storage, placement, and demand, so you don’t blindly remove SKUs, rather make the right product available in the right quantities.

Industries that need SKU optimization

Retail: The industry that constantly deals with bloated inventories: product styles, colors, size variants, occasion-based wear, all on top of seasonality and space demand. SKU optimization can streamline product offerings, allowing to focus on bestsellers.

eCommerce: The classic 80/20 rule works for eCommerce, with 20% of products garnering 80% of revenue. Imagine the product and cost waste without warehouse optimization.

Pharma: Pharma manufacturing and storage involve various doses, packaging, and brands for the same cause. Plus, there is a risk of expired SKUs. SKU optimization for pharma means that critical drug is available in the right place and at right quantities.

FMCG: Unsold SKUs and inventory cause heavy losses here, as it falls under the high volume, low shelf life, and low margin category. SKU optimization gives them a chance to find the best flavor, size, and product category for the right markets, minimizing wastage and sales velocity.

How to know if your business needs SKU optimization

There are signs with which you can find, if you need to start optimizing SKUs. These are common scenarios found across retail, eCommerce, and other inventory-based businesses.

1 - Overstocking of some items, but stockouts across others. 2 - SKUs overlapped, leading to cluttered storage 3 - Increasing warehouse storage costs for storing dead and slow-moving stocks. 4 - Customers often find it difficult to navigate through your product ranges, which can be identified through high cart abandonment rates.
5 - Demand mismatch across zones that’s difficult to track.

In short, if you find slow-moving products stored for longer durations, falling margins, and finding wrong products in wrong places, then SKU optimization is for you.

Common SKU optimization challenges

Here’s why SKU optimization results aren’t as effective as it should be.

Siloed data across systems: POS systems, marketplaces, ERPs, and sales logs – when data is trapped within these systems, the true picture of SKU gets lost in mid.

Expanding inventory: merchandisers keep adding products and variants without stopping unpopular ones, leading to over sku-ing, overloaded warehouses, and confused customers.

Demand goes up and down: some products have seasonal demands; some are sold across the seasons. And the exact demand remains unclear of what’s needed in the future, let alone the current needs.

Problems with shelf space: Product size and storage constraints must be a part of SKU optimization suggestions, if it must be effective. Storage efficiency often gets ignored leading to poor materialization of SKU optimization techniques.

Dealing with suppliers: The more the suppliers, the complex the SKU rationalization becomes. It can get difficult to tackle negotiations, procurement processes, and supply chain movements all together as the number of SKUs increase.

No accurate forecasts: SKU-level forecasting is required for perfect slotting and optimization, which can be tricky without the right data science team.

Create an SKU optimization strategy

Here's how you can implement SKU optimization a part of your warehouse slotting and storage.

Cleanse and centralize data: Bring data from inventory, POS, supply chain, customer data, and more into a single platform (using data warehouse or data lake).

Demand forecasting models: Having no clue on demand and facing regional demand mismatch can be both fixed by time series or ML based forecasting models. This will predict demand across products, SKUs, zones, regions, etc.

Start with rationalization: Based on your demand findings and sales data, segment SKUs into high performers, mid, and low performers. Cut down low performing SKUs based on sales, profitability, and customer preferences.

Dynamic stock allocation: Set up AI-driven inventory rebalacing to let SKUs flow in the right place at the right time. With the help of simulation and scenario analysis, you can even match demand disruptions and seasonality with procurement, marketing, and promotions.

Continuously monitor with dashboards: Real-time dashboards that show trench-level SKU performance across stores, eCommerce platforms, zonal regions, etc.

Pair inventory with recommendation engines: Promote low-selling items through recommendations, suggesting the best fit SKUs to the right customers, rather than overwhelming them with multiple choices.

Tools for SKU optimization

Every business’s product mix is unique—what sells fast in a grocery chain may sit idle in a pharma warehouse, and what works for one eCommerce brand may overwhelm another’s customers. That’s why SKU optimization isn’t a one-size-fits-all exercise. A custom SKU strategy, powered by data and AI, ensures you carry the right products, cut waste, boost margins, and keep customers happy. In short, it turns inventory from a cost center into a growth driver.