How SKU Rationalization Lowers Warehouse Costs

February 28, 2017 BY Charles Fallon

sku rationalization
A twist on the old 80/20 rule that we intuitively know but commonly ignore is that the bottom 50% of SKUs in almost any distribution center generate less than 5% of a company’s profits.

That “long tail” of products can be important. For many operations, slow-moving, low-profit SKUs are critically important in distinguishing one competitor from another; they prove that extra effort to serve important customers.

Still, there is such a thing as too many SKUs.  Sometimes product rationalization is truly needed.

Take, for example, a regional distribution center for a major foodservice distributor that we visited some years ago.  While auditing the operation we got to the cooler and found a pallet of ketchup where there should have been onions or peppers.  When I asked the warehouse manager why, he gave an “aw shucks” shrug and said, “we can’t fit all our dry products in the dry area.”

The operating data we analyzed bolstered the warehouse manager’s case: the dry department was overloaded with SKUs and the pick line (available locations or slots) was woefully inadequate to fit them all.  To keep their operation running, the manager decided to take the only free space they had – in the cooler.

But at some point the company should have stopped and asked, “are the distribution costs of carrying these low-margin SKUS worth the benefit?”  Should the company invest capital in expanding the dry department in order to stock all these items or would SKU rationalization – eliminating un-profitable SKUs from inventory – defer the need for expansion and save capital?

By analyzing the items that contributed least to the operation’s profitability, we identified many that could be deemed “non-essential” slow-movers.  In some cases, the warehouse stocked half a dozen varieties of the same salad dressing; the slowest of which were purchased by a handful of very small accounts.

Following our recommendation for SKU rationalization, the distribution center realized two benefits.  One, it reduced the amount of capital it needed to invest in distribution infrastructure.  Two, it boosted picker productivity with shorter pick lines and higher pick densities.

There are exceptional times when you have no choice but to put ketchup in the cooler.  More often though, a company has saddled itself with more SKUs than it really needs, tying up capital and slowing down operations.  SKU rationalization can help both reduce required capital and lower operating costs.