▸ Too many products can increase supply chain costs and complexity.
▸ Reducing SKUs can significantly boost operational efficiency throughout the supply chain.
▸ SKU consolidation frees up capital and warehouse space.
▸ With fewer SKUs, companies can promote high-performing products and divest from underperforming ones.
Few things are more stress-inducing than perusing the chip aisle of your local supermarket.
We’re confronted with a virtually endless number of options as hundreds of bags of chips, pretzels, and popcorn create a dizzying array of colors. For the average indecisive person, picking just one bag off the shelf quickly leads to analysis paralysis.
In a world with limitless variety, sometimes too much is too much. We start overthinking things, leading to trouble picking out anything at all.
Offering hundreds of options may be overkill for consumers and can quickly stress out retailers, distributors, and manufacturers.
As companies add SKUs (stock keeping units), they create opportunities for waste and lost revenue, including:
Can reducing SKUs make a meaningful difference? Yes, but it requires discipline and an extremely tight supply chain.
Companies like Dollar General, Aldi, and Apple have created blueprints for success by maximizing limited product offerings. This doesn’t mean companies should take a chainsaw to their product lines, but they can cut fat without losing revenue.
“Having the right mix of product offerings in the right location, at the right time, is key to operational efficiencies. No matter the business, carrying inventory comes at a cost,” Kris-Tech’s Director of Supply Chain, Marcus Tagliaferri, said. “That’s why it’s imperative to ensure you have the right mix and your inventory is turning.”
Reducing SKUs only slightly could have a significant impact, especially when paired with an inventory management system.
If you’re unfamiliar with inventory tracking, SKUs (Stock Keeping Units) are unique alphanumeric codes companies assign to products.
Every distinct product gets a SKU based on its attributes, with new ones issued for each unique option. For example, every size, color, shape, or style has a different SKU.
When consumers buy products, inventory systems track scanned SKUs and automatically adjust to reflect those changes. Product SKUs also track across the supply chain, allowing manufacturers, distributors, warehouses, and retailers to maintain stocking levels.
I know what you’re thinking–more is better, right? Unfortunately, sometimes more is just more.
Just because companies can make a product and introduce it to the market, it doesn’t mean people will buy it. Consumers face a tsunami of options, and as more competition enters the market, their attention becomes increasingly valuable.
SKU numbers track inventory, using codes to identify unique product offerings. Using this information, retailers, distributors, and manufacturers can see product sales flow. If people aren’t buying a specific item gathering dust on shelves, do we need it?
As businesses add assigned SKUs to the system, they must track more data. However, more selection means companies can become increasingly granular to meet specific customer wants.
Unfortunately, too many poorly-tracked SKUs could do more harm than good, including:
Supplying everything to everyone seems easy, but does it make sense? Sometimes, restraint and focusing on a select number of winners helps us focus on what the consumer needs most.
This is where SKU rationalization or SKU consolidation can help businesses tighten product offerings and operations.
Surprisingly, restaurants generally have a great handle on product offerings.
When you think about it, menus are basically the equivalent of a product catalog. On nearly every menu, you’ll likely see an interesting yet cleverly designed way of selling top-performing items.
Items that sell well, along with some lower-cost, higher-margin dishes, are specials. Less popular items receive less prominent placement, often falling in line on the page. Finally, the restaurant removes the worst-performing dishes and replaces them with new items.
This process, called menu engineering, is similar to SKU rationalization. In an industry where margins can be razor-thin, a 40-page menu is disastrous.
The same is true for many companies. Why manufacture, distribute, and sell everything when it’s easier – and potentially more profitable – to narrow the scope.
If businesses have too many SKUs, it leads to confusion, trouble tracking inventory, and fulfillment issues.
Beyond logistics, more SKUs mean more physical items occupying space in warehouses, on trucks, and on shelves. With more space devoted to a variety of products, it leaves less space for top performers and new items.
“The Pareto principle is so powerful when it comes to SKU management and rationalization,” Tagliaferri explained. “Most sellers will find that somewhere around 20% of their SKUs accounts for 80% of their revenue. That doesn’t mean they should necessarily remove the other 80% of SKUs, but they should be managed efficiently and possibly reduced. Doing that allows for more focus on high-value items, ensuring better availability and customer satisfaction.”
Some manufacturers or distributors may also experience product cannibalization when new products immediately bite into the sales of existing items. Essentially, businesses swap sales without seeing much, if any, new revenue.
While cannibalization makes sense for software and technology businesses, it can leave companies in other industries spinning their wheels.
When companies combine a strong, streamlined SKU catalog with capable inventory management software, good things happen.
Constantly curating inventory and product offerings can make a difference on operations, inventory, sales data, and revenue.
Fewer SKUs tightens the supply chain and limits mistakes during shipping. Additionally, during the pick/pack phase, workers are less likely to grab incorrect products or miss stockouts.
The result is happier end users and a potential increase in brand loyalty.
Tracking products along the supply chain is an art, but some science is involved, too.
Optimized SKU systems reduce money spent on underperforming products. It also prevents stockout issues from occuring thanks to a series of reorder points.
For the customer, this means their favorite items are ALWAYS in stock and ready to ship. Meanwhile, businesses won’t miss out on sales because of an easily preventable mistake.
When manufacturers, distributors, and retail stores have fewer products to monitor, they save money.
Smaller SKU catalogs have less inventory overhead, less warehouse space, and fewer employees. Smaller product catalogs also have more detailed data, helping companies make smarter decisions. This leads to better product forecasting, customer anticipation, trendspotting, and product gap analysis.
In a world where Walmart and Amazon offer hundreds of millions of products, sometimes it’s more efficient to do more with less.
Brands like Dollar General, Aldi, and Apple intentionally limit the number of SKUs they carry to avoid overreaching. They operate with shorter, less complex supply chains, leading to better sales and happier customers.
In 2024, Dollar General slashed 1,000 SKUs – about 7% of its inventory levels.
Despite slashing the number of products on the shelves, the company increased year-over-year earnings. The company also reaped savings by closing 15 temporary warehouses it was utilizing.
With a stronger focus on high-turnover items and increasing productivity, Dollar General tightened its supply chain.
Aldi positions itself as a low-cost leader for good reason. The company has historically maintained a small list of SKUs to keep prices lower than competitors. While the average grocery store maintains more than 10,000 unique SKUs, Aldi is ruthless in their simplicity. To that end, they only carry about 1,400 SKUs, drastically cutting back on inventory space and focusing only on fast movers.
By focusing on in-house brands and limited options, the company reduces overhead costs, limits same-category cannibalization, and keeps products moving.
In Apple’s case, the company focuses on limited inventory measured in days, limited warehouse space, and few suppliers.
This formula emphasizes low inventory while promoting product quality and development. Every supplier competes for Apple’s business, ensuring the company gets the best quality at the best price.
Meanwhile, Apple’s insistence on limited inventory reduces threats from competitors while preventing obsolescence. As new products roll out, the company is less occupied with old stock sitting on shelves and tying up money.
“Sales data is your most powerful tool to manage inventory,” Tagliaferri said. “Some of the best metrics for managing inventory and individual SKUs are frequency of turns and days of inventory, both at the aggregate and SKU levels.”
By keeping the number of products small, Apple has faster lead times and more resources for improvements. At the same time, they have far fewer obsolete products clogging warehouse shelves, which would sacrifice money and revenue.
If companies carry an expansive number of SKUs, investing in a complex tracking system to monitor them is crucial.
Amazon carries hundreds of millions of SKUs but also has the tracking infrastructure to keep everything running smoothly. The company owns its supply chain and tracks every product and package throughout its journey.
Thousands of small businesses, however, could benefit from offering fewer options. With fewer SKUs, they can focus on pushing high-performing products while removing or limiting underperforming ones.
“Strategies include applying classifications to your inventory, such as ABC classes based on cost multiplied by volume,” Tagliaferri said. “This represents the value each SKU provides and therefore helps segment your inventory into appropriate levels and strategies for replenishment.”
They can also tailor product mixes to reflect current and emerging customer trends. This lessens the need to hustle obsolete or unpopular items out the door and lose critical revenue. It also frees up capital for research and development, promoting innovation.
While it might seem tempting to create SKUs for everything under the sun, a little restraint goes a long way. If done right and well, businesses run faster and are more reliable, directly impacting the bottom line.