Goal of the analysis:
The goal of a Product Mix and SKU Rationalization analysis in the consumer packaged goods (CPG) industry is to optimize the assortment of products offered by a company, ensuring that each SKU (Stock Keeping Unit) contributes positively to sales, profitability, and operational efficiency. This analysis helps CPG companies streamline their product portfolio by identifying underperforming or redundant SKUs, focusing on high-performing products, and improving overall category performance. SKU rationalization reduces complexity in manufacturing, supply chain, and inventory management while aligning product offerings with consumer demand.
Data required:
- Sales data by SKU (e.g., revenue, units sold)
- Profit margin data by SKU
- SKU-specific inventory and supply chain costs (e.g., storage, handling, transportation)
- Category performance and market share data by SKU
- Consumer demand data (e.g., purchase frequency, SKU preference)
- Retailer-specific data on SKU performance (e.g., shelf space allocation, sales velocity)
- Competitor product mix for comparison (if available)
- Promotional performance data by SKU (e.g., promotional sales uplift, discounting strategies)
- Feedback from retailers and sales teams on SKU performance and demand
- SKU-related production and manufacturing costs
Detailed step-by-step instruction on how to conduct the analysis:
1. Define the objectives of the analysis.
Establish the goals for the product mix and SKU rationalization, such as increasing profitability, reducing operational complexity, improving category performance, or aligning with consumer trends. For example, a goal might be to reduce the number of low-performing SKUs by 20% or to consolidate product variations to streamline supply chain operations.
2. Collect sales and profitability data by SKU.
Gather sales data for each SKU in the product portfolio, including revenue, units sold, and profit margins. Use this data to identify high-performing SKUs that generate the majority of sales and profit, as well as underperforming SKUs that contribute little to overall business performance. Calculate profit margin for each SKU using the formula:
Profit Margin (%) = ((Revenue – Cost of Goods Sold) / Revenue) x 100
For example, if a SKU generates $100,000 in revenue and has a COGS of $70,000:
Profit Margin = (($100,000 – $70,000) / $100,000) x 100 = 30%
3. Assess SKU contribution to overall portfolio performance.
Rank SKUs based on their contribution to total revenue and profitability. A common approach is to use the Pareto principle (80/20 rule) to identify the top-performing SKUs that account for the majority of sales and profit.
For example, if 20% of SKUs generate 80% of revenue, those SKUs should be prioritized for continued support, while the remaining 80% of SKUs may need rationalization.
4. Evaluate SKU-level inventory and supply chain costs.
Review the costs associated with producing, storing, and distributing each SKU. Some SKUs may have high supply chain costs due to factors like low order volume, high storage costs, or frequent replenishment needs.
If an SKU’s sales do not justify its associated operational costs, it may be a candidate for rationalization. Track metrics like:
- Cost to serve: The total cost to produce, store, and distribute a given SKU.
- Inventory turnover: How frequently a SKU is sold and replaced over time.
5. Analyze consumer demand and purchase behavior by SKU.
Examine consumer purchasing patterns to understand which SKUs are in high demand and which have lower consumer appeal. Identify SKUs that have low purchase frequency or limited appeal to target customers. If certain products are redundant or offer little differentiation, consider consolidating or removing them from the portfolio.
6. Review retailer-specific SKU performance.
Gather data on how each SKU performs across different retail partners. Retailers may have specific preferences for certain SKUs, and underperforming SKUs may take up valuable shelf space. Work with retailers to determine which SKUs to continue supporting and which may be candidates for discontinuation.
7. Assess promotional performance by SKU.
Analyze how promotions and discounts impact the performance of individual SKUs. Some SKUs may rely heavily on promotions to generate sales, which could erode profitability.
Calculate promotional sales uplift for each SKU:
Sales Uplift (%) = ((Sales During Promotion – Baseline Sales) / Baseline Sales) x 100
For example, if sales for a SKU increased from $20,000 to $30,000 during a promotion:
Sales Uplift = (($30,000 – $20,000) / $20,000) x 100 = 50%
If certain SKUs only perform well during promotions but have low profitability, consider discontinuing or re-evaluating promotional support for those SKUs.
8. Compare SKU performance to competitor product offerings.
Benchmark your product mix against key competitors. Identify whether competitors offer similar SKUs with better performance or higher market share. If competitors are outperforming in certain product categories, consider adjusting your SKU portfolio to focus on more competitive offerings.
9. Identify redundant or low-performing SKUs.
Based on the analysis of sales, profitability, and supply chain costs, identify SKUs that are redundant, low-performing, or unprofitable. Consider consolidating similar SKUs, removing underperforming products, or replacing slow-moving SKUs with more in-demand products.
10. Develop a SKU rationalization plan.
Create a plan to rationalize the product mix by removing or consolidating underperforming SKUs. Ensure that rationalization efforts align with broader business goals, such as improving profitability, reducing complexity, or enhancing supply chain efficiency. Communicate the rationalization plan
Format of the output of analysis:
The output of a Product Mix and SKU Rationalization analysis typically includes:
- A ranked list of SKUs based on sales, profitability, and operational costs.
- A breakdown of SKU contribution to overall sales, highlighting the top-performing and underperforming products.
- SKU-level inventory turnover and stock level analysis, identifying low-turnover products.
- Promotional effectiveness data, showing the impact of promotions on SKU performance.
- Identification of redundant SKUs or product lines subject to cannibalization.
- Consumer demand trends, highlighting opportunities for portfolio alignment.
- Competitor benchmarking data, showing differences in product mix and SKU offerings.
- Recommendations for SKU rationalization, including which products to retain, consolidate, or discontinue.
How to interpret results:
- High sales and profitability with low operational costs: These SKUs are likely core products that should be retained and prioritized. They drive the majority of revenue and contribute positively to overall profitability.
- Low sales with high operational costs: SKUs that generate low sales and incur high costs are prime candidates for discontinuation or consolidation. These products may tie up resources without delivering sufficient value.
- High promotional spend with limited sales uplift: If certain SKUs require heavy promotional support but show limited sales gains, consider whether the promotional investment is justified. Discontinue or consolidate SKUs that are overly reliant on promotions.
- Low inventory turnover with excess stock: SKUs with low inventory turnover may indicate low consumer demand or overstocking. Consider discontinuing or reducing production for these products to free up working capital and reduce storage costs.
Steps a company can take to improve on this measure:
- Focus on top-performing SKUs: Prioritize the production, promotion, and distribution of high-performing SKUs that drive the majority of sales and profitability. Allocate more resources to these products to maximize their potential.
- Eliminate low-performing or redundant SKUs: Discontinue SKUs that generate low sales, have high operational costs, or overlap with other products in the portfolio. Consolidating similar products can reduce complexity and improve operational efficiency.
- Improve inventory management: Adjust production and inventory levels for SKUs with low turnover to reduce excess stock. Streamline the supply chain to ensure that high-demand products are always available, while minimizing overstocking of slow-moving items.
- Align with consumer trends: Continuously review market trends and consumer preferences to ensure the product mix remains relevant. Introduce new SKUs in growing categories or expand successful product lines that align with evolving consumer needs.
- Collaborate with retailers: Work closely with retail partners to optimize the SKU mix based on their shelf space, category strategies, and consumer preferences. Rationalizing SKUs can improve retailer relationships by reducing complexity and ensuring the right products are available to meet demand.
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