Imagine the demand for one of your products is through the roof. In response, you purchase more of that product with several variations. Your goal is to capitalize on the popularity of the product by giving your customers choices like color, style, and size.
That describes SKU proliferation. It is the process of adding products or variations of products to your inventory. Each of those variants receives its own unique SKU.
SKU proliferation impacts almost every aspect of your business. In this article, we will describe the pitfalls of SKU proliferation and its implications on your business as well as how to manage it effectively.
A SKU is a unique number assigned to a specific product
SKU stands for stock keeping unit. It is an alphanumeric code assigned to a product that helps easily track and manage inventory. SKUs differ from UPCs and GTINs. SKUs are individual to the business and are used to make purchasing decisions to improve profitability. UPC is a Universal Product Code used primarily in North America and GTINs are Global Trade Item Numbers used throughout the rest of the world and every product has its own distinct code number. Competing businesses that carry the same product will have the same UPC/GTIN but a different SKU.
Here’s how it works. A clothing company might have several variants of the same item including size, material, and color. Each variant is assigned a unique SKU. For example, a medium-sized blue t-shirt can be assigned the following SKU: BLUTEEMEDCF26.
SKUs enable businesses to display similar items to customers based on common features. This is where upselling and cross selling shines – it’s that suggestion just before checkout that reads “frequently bought together” or “you might also like.”
SKU proliferation and its causes
As trends fluctuate and competitors enter the marketplace, businesses strive to keep up with customer demands. SKU proliferation is the process of adding more products (SKUs) to your inventory to meet those needs. SKU proliferation can be considered a byproduct of multichannel selling – customers are used to having multiple choices at their fingertips.
Before we discuss the problems associated with SKU proliferation, let’s explore why businesses encounter this problem in the first place.
1. Technology upgrades
Technology has changed the way we do business. Multichannel selling has forced wholesalers and retailers to carry more inventory in an effort to provide a seamless shopping experience. Without proper sales forecasting, businesses overstock to meet anticipated sales through multiple channels.
2. Faster delivery preferences
Imagine how quickly you would be out of business if every time you sold a product you had to wait for the product to reach your store before sending it to your customer? To accommodate delivery demands, more and more businesses are stashing inventory to dispatch if and when an order is placed.
3. Poor inventory management
Inefficient inventory management leads to a stockpile of unwanted or obsolete inventory, each with individual SKUs.
Problems created by SKU proliferation
As the variety of products (SKUs) increases, so does the complexity of running your business. SKU proliferation disrupts the logistical process, forces rigorous inventory control, and increases costs.
Here are just a few of the larger problems created by having too much inventory.
1. Increase in storage costs
Storage costs are directly correlated to the amount of inventory a business has. The more inventory you keep, the higher your storage costs will be. In addition to the costs of the actual space, anticipate rising costs in utilities, insurance, and staff to manage storage.
2. Difficulties in fulfilling orders
As inventory increases, it can become more challenging to fulfill orders accurately and in a timely manner. Having too much inventory can be confusing, leading to errors caused by similar SKUs or incorrectly assigned SKUs. As a consequence, the wrong product might be shipped, increasing costs and hassles associated with returns and a potentially negative reflection on your brand.
3. Inefficient cash flow
Securing more inventory comes at the expense of something else. Funds allocated towards inventory can decrease cash flow when your business needs it most. According to a US Bank study, 82% of business failures result from poor cash flow management.
4. Increase in order fulfillment times
Having too much inventory slows down the fulfillment process. Overstuffed warehouses create time-consuming efforts to find products and package orders. This is on top of errors that might be caused by too many SKUs.
SKU rationalization is the remedy to SKU proliferation. It is a method of reducing the overall number of SKUs by identifying obsolete or poor-performing inventory. Just keeping your best sellers cuts storage and management costs and improves profitability.
SKU management for businesses
As your business grows, SKU proliferation may seem inevitable. But it doesn’t have to ruin your business. Using SKU rationalization, you can identify those products that are actually making you money and return or “fire-sale” the rest.
Effective SKU management not only saves money but also time. Decreasing inventory will allow you to easily find and package online orders and replace items on the sales floor.
It might seem like SKU proliferation is a good thing. After all, it’s a strategy to ramp up sales while the buying is hot. The catch is its impact on business logistics. Proactively monitoring your SKU base allows you to implement corrective measures to effectively scale your business. It is part of an inventory management solution that enables you to forecast sales and keep up with trends without busting at the seams.
Cin7 was built with modern businesses in mind. Its inventory and order management software offers a cloud-based solution that integrates all your sales channels into a single platform. Cin7 facilitates advanced automation processes creating seamless transactions centered around a positive customer experience.
Ditch the spreadsheets and stop manual data entry. Conquer new markets with Cin7’s inventory and order management system.