SKU optimization is a daunting task.
Nobody likes it.
For the commercial team, it’s especially painful.
Just the thought of cutting down SKUs is terrifying.
But here’s the truth: it’s one of those delayed, dreaded tasks that is absolutely critical to maintaining healthy profits.
What is SKU Optimization?
When a company grows fast, its product portfolio often becomes bloated.
Too many SKUs.
Too little contribution.
Too much complexity.
SKU optimization means managing the portfolio strategically; understanding the real contribution of each SKU.
This contribution is in gross margin and also from the customer’s perspective.
It’s about reshaping the company’s product offering into something sharper, leaner, and more profitable.
Let’s break this process down into 7 practical steps.
Step #1 – Collect and Clean Data
Bad data = bad decisions.
Data is the foundation.
This first step starts by compiling accurate sales, inventory, and profitability data.
We want to understand how each SKU is performing before making any suggestions or decisions.
That means:
- Sales volume and frequency
- Inventory levels and turnover
- Gross margin and profitability
Clean data gives the power to analyze with confidence.
Step #2 – Run Portfolio Segmentation
Once the data is clean, segment your SKUs.
Group them based on performance, profit, volume, and value. This allows to focus efforts where they will have the biggest impact. Think 80/20 rule; 20% of the SKUs often deliver 80% of the value.
You can use ABC analysis, Pareto charts, or even a quadrant approach like:
- High volume, high profit (Keep and grow)
- Low volume, high profit (Niche heroes)
- High volume, low profit (Efficiency play)
- Low volume, low profit (Rationalization candidates)
Step #3 – Identify Non-Performing & Low-Value SKUs
Now the real work begins.
We want to find the SKUs that are:
- Overlapping or cannibalizing others
- Generating low margins
- Showing consistently low or no sales
These are the initial potential cuts to then analyze further.
Step #4 – Align with Sales, Marketing, and Finance
Before making any move, it is important to present the data to the other functional teams and get alignment.
Key teams to get involved are Sales, Marketing, and Finance.
It is essential to ensure you are not planning to cut a niche SKU that is part of a major contract, or one that drives traffic to your retail shelf, for example.
This is where S&OP (sales and operations planning) shines.
It is a fantastic forum to align on rationalization without hurting critical customer relationships.
Step #5 – Reach Consensus & Assess Impact
It’s testing time.
In this step, walk through each SKU identified for potential elimination and assess the ripple effect:
- Will it cause manufacturing inefficiencies?
- Will it delay orders or hurt fill rates?
- Will there be a negative impact on key customers?
SKU optimization is complex.
It requires looking at different angles.
It’s about making sustainable moves, understanding their impact.
Step #6 – Communicate the Changes Proactively
Once the decision has been made, communication is fundamental.
We want the following to happen:
- Notify cross-functional teams
- Inform key customers early
- Offer replacement SKUs if needed
- Update planning and forecasting systems
Proactive communication avoids confusion and builds trust.
No one likes surprises, especially the company’s customers.
Step #7 – Rationalize SKUs
This is where execution takes place.
Eliminate or consolidate underperforming SKUs and streamline your portfolio.
Manage the change:
- Sell through existing stock
- Update BOMs, routings, and master data
- Monitor performance post-cut
Less clutter = better focus.
Inventory moves faster, forecasts become more accurate, and operations run smoother.
This translates into greater profits and improved working capital and cash flow.
Conclusion
SKU optimization isn’t a one-time project.
In advanced S&OPs, we want to review the portfolio as an official step in each planning cycle.
We want a simpler, smarter, and more profitable portfolio.
Less is more when you optimize strategically.
Are you currently doing portfolio review and SKU optimization?
What is working?
What is not working?
